Sellers ran roughshod through the tech sector over the past week. And while the liquidation was seemingly indiscriminate, some stocks held up better than others. That said, I’m happy to report red-hot electric vehicle maker NIO (NYSE:NIO) suffered very little damage to its uptrend. And, as a result, it remains one of the better pullbacks to shop if you’re looking for the best buying opportunities.
After exploring its price action, we’ll discuss current implied volatility levels and which options strategies are the best to use right now. Spoiler alert: I’m going to show you how to build a trade with an extremely high probability of netting a nearly 50% return on investment — in just one month.
NIO Stock Chart
There are two paths to analyzing the price action of NIO stock. The first involves looking at its absolute performance. How has it behaved in a vacuum, in other words? The second route adds insight by making comparisons between Nio’s behavior, and that of its sector or the broader market. This is known as its relative performance.
Allow me to lead with the conclusion of this analysis. Nio looks fantastic on both fronts. It offers a beautiful bull retracement and has held up better than its peers. When you add relative strength to absolute strength, it creates a killer combo — all but compelling spectators to throw their money down and bet.
The weekly chart chronicles NIO’s rise from obscurity. It spent the first 18 months of its public life as a little known Chinese car company with questionable fundamentals and deteriorating technicals. During the depths of its depression, NIO befriended $1 and came within a whisker of being a penny stock.
And then, everything changed.
Through a series of fortunate events, the company shored up its balance sheet and become a viable bet on the future of electric vehicles. The price chart soared tenfold this year, from $2 to $20 amid massive accumulation. Along the way, volume swelled, confirming institutions were wading into the waters with high conviction. Down weeks have been a rarity, and even when they’ve struck, we’ve seen zero follow-through. The buying appetite from bulls has simply been too powerful to allow it.
Overall, NIO stock has been on its best behavior since May. The uptrend has been pristine with every dip bought and breakout chased. Four straight down days carried us into Wednesday’s session, and the retreat carried NIO right into the rising 20-day moving average. As has been its reputation, the 20-day once again saw support from at its shores. Wednesday’s 6.22% gain broke the previous day’s high, and officially ended the retracement.
Short Puts Offer Mouthwatering Returns
If you wanted to go for the jugular, you could purchase call options. But, honestly, the reward is so high in short put trades that I wouldn’t bother with the lower probability stuff. Nio’s implied volatility is 123%. By comparison, the S&P 500 is only 28%. And, as a result, options premiums offer big payouts.
Also, NIO stock’s low price tag of $18 keeps the initial margin required for the trade minimal. Here’s a formula you can take to the bank: high options premium + low margin requirement = fantastic return on investment.
The Trade: Sell the Oct $13 put for 63 cents.
Consider it a bet that NIO sits above $13 at expiration. If it does, you’ll capture the max gain of $63 per contract. The initial margin requirement should be around $130, translating into a potential return on investment of nearly 50%. The market is pricing in an 85% probability of capturing the max gain.
By naked put standards, these numbers are glorious.
On the date of publication, Tyler Craig held LONG positions in NIO.
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