If you want a silver lining for the recent weakness in the S&P 500, look no further than Workhorse (NASDAQ:WKHS). The momentum darling has fallen alongside the market, creating quite an attractive buying opportunity. Consider it a second chance of sorts for those that missed the epic breakout from early-September.
The rapid rise from $20 to $30 left many would-be buyers behind. They were relegated to watching others’ gains pile up from afar. Until now, that is. To any who’ve been begging for the market gods to return Workhorse to its breakout point, to give them a second crack at jumping in — your prayers have been answered.
The WKHS Stock Chart Is At Support
Profit-taking finally emerged on Monday, and prices have been retreating ever since. The four-day drop has pushed the stock down nearly 30%. But don’t let the size of the number mislead you. Given how much prices had risen before this week’s whack, we’re talking about nothing more than a garden-variety retracement to the rising 20-day moving average.
Thursday finally saw buyers fight back. Despite a full-on shoving match, the session ended with a neutral candle that signals the downside momentum is waning.
The location and timing of bulls returning is hardly surprising. Dip buyers are always loitering near the 20-day average, waiting to strike. On top of that, we’re also coming into a critical old resistance zone. The principle of polarity states that old ceilings tend to become new floors. The reason is twofold. First, any poor short-sellers who didn’t exit the first time Workhorse blasted above the $21 resistance now have another chance to do so. Second, the sad group of bulls that should have bought the first time it broke out now have their second chance.
The combination of pained short-sellers buying to cover at less of a loss, and new bulls piling in creates an undercurrent of demand that should cause the $21 zone to provide support.
Because anything is possible, it’s worth noting the price at which the pullback becomes more of a trend change. For that, I’m watching the support zone of $14-$15. It held the stock aloft through all of July and August and is a must-defend level if Workhorse is to maintain any degree of bullishness. Given the firepower and huge social following for the company, there’s only a remote possibility of this happening.
Put Premiums Are Ripe for Selling
The options market provides some exciting possibilities if you’re willing to bet the dip is a buy. For starters, the implied volatility is in the stratosphere. But why shouldn’t it be? The realized volatility or actual movement of the stock has been utterly insane. Ramping from $2 to $30 in less than six months makes traders willing to pay out the nose for option contracts. Implied vol has come down quite a bit from its June peak, but it’s still at 165%.
The pumped-up premiums open the door to selling far out-of-the-money puts as an alternative to purchasing stock. Although the potential reward is limited, the high probability of profit could more than make up for it. For example, let’s say you’re willing to wager Workhorse shares remain above $15 for the next three weeks. You can sell the Oct $15 put for around 70 cents per share, or $70 per contract.
Because the stock price is low, the initial margin requirement is only around $150. That makes the potential return on investment a tasty 47% return. All for simply betting the stock sits above $15 at expiration.
You are obligated to buy shares of stock at $14.30 if the put expires in-the-money. You can sidestep assignment, however, by exiting on a break below $15.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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