The comeuppance for the Nasdaq Composite is finally here, and Workhorse (NASDAQ:WKHS) is getting caught up in the ruckus. From peak to trough, WKHS stock fell 16% before snapping back big time on Friday, closing the session up 11.5%.
The ultimate question following the quick drop and pop is whether Workhorse’s uptrend is still intact or not.
Was the severity of the whack sufficient enough to reverse the nascent uptrend in WKHS stock? Did it destroy the bulls’ well-founded narrative based on the beauty and stability of the price trend?
No, and no.
As we will discuss in greater detail below, this week’s selling raid was nothing more than a garden-variety retracement for WKHS. It remains a good buying opportunity, even after Friday’s amazing recovery.
WKHS Stock Is as Healthy as a Horse
Workhorse is a technology company offering solutions to commercial transportation. It designs and manufactures high-performance electric vehicles, placing it in the same industry as Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA). This should explain part of why WKHS stock has been on fire this year. Traders have been bidding up electric vehicle stocks with abandon.
Virtually all of Workhorse’s gains came in June. Its share price ballooned nearly ten-fold before a top was found. After that, the market gods hit the pause button, allowing the stock to digest its gargantuan gains and its long-term moving averages to catch up. Impressively, WKHS held on to the lion’s share of the gains. That type of behavior confirms the bid beneath the surface remains, and June’s meteoric rise was not just built on hype alone.
August carved out a nice little series of higher pivot highs and lows, showing buying aggression was finally building. Just before this week’s dip, prices ramped to a two-month high. That, more than anything, is what allowed WKHS to pull back substantially but remain in a healthy uptrend.
Even with Wednesday and Thursday’s two-day whack, prices are still above the 20-day moving average. The big tell for me that demands remaining bullish are the volume patterns. Look at the participation during the last three advances versus the subsequent pullbacks. Signs of accumulation emerged during each upswing. In contrast, volume during the retracements was minimal. Though we saw widespread distribution in the Nasdaq and mega-cap tech stocks, the massive selling did not inflict WKHS stock.
That, coupled with the fact that we are still above all moving averages, leads me to believe this dip is an attractive buying opportunity — particularly if you missed the breakout earlier in the week.
How to Trade Workhorse With Options
When sizing up the best options trade for this type of setup, I consider both the stock price and implied volatility. Right now, WKHS stock is cheap enough for long call or short put plays.
However, the sky-high implied volatility of 175% makes me think twice about buying calls. They are too expensive. Thus, if we want a lower-probability, higher-potential profitability trade, call spreads are a must.
On the flip side, the rich options prices work to the advantage of a naked put by increasing the premium received. The margin requirement will be minimal, given the low cost of shares, resulting in a smile-inducing return on investment. I also prefer the naked put in this case because the Nasdaq’s sharp pullback could continue to hang over tech stocks, preventing them from any kind of explosive move higher.
In that scenario, the naked put is likely the better play.
The Trade: Sell the Oct $12.50 put for $1.25.
Consider it a bet that WKHS stock sits above $12.50 at expiration. The max gain is $125 per contract.
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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