The Street’s hottest electric vehicle stock Nio (NYSE:NIO) is fast approaching its next critical test — earnings. And expectations and optimism for NIO stock are running really, really high into the event.
Since its last report in August, Nio has undergone a meteoric rise of 210%. Such mouthwatering gains are epic when they transpire over a year, let alone a single quarter.
Skeptics will argue investors could be getting ahead of themselves. There’s no denying this once little-known Chinese EV stock is pricing in a great deal of future growth. But such is always the case when momentum takes hold.
Momentum can be a self-fulfilling prophecy, creating a virtuous cycle. Higher prices attract more buying, which begets higher prices. And it’s impossible to know which stocks are building a sustainable rise and which are built on fluff until well after the fact.
In the near term, November 17’s earnings report looms large as an obvious catalyst that will set the tone for Nio’s next move. Given the magnitude of its price rise, let’s just say the numbers don’t need to be good; they need to be great. Otherwise, some severe register ringing could be in store.
Nio Stock Chart
The pre-election plunge in the S&P 500 from late-October didn’t impact NIO stock. Rather than sinking with everything else, it zipped higher in an impressive feat of relative strength. But what’s new? Nio has been defying gravity while slaughtering short-sellers all year long. Muscle flexing is what it’s known for.
The price trend just saw a robust increase in momentum during the current swing. Far from slowing down, the already swift rise has turned parabolic. Uptrend? Check. Increasing Momentum? Double Check.
On the moving average front, all smoothing mechanisms are rising in support of Nio’s bid for world domination. The 20-day moving average has been the hot spot for support buyers since May. But we’re not even close to that level. The distance between it and the price is more significant than at any time since the uptrend began.
That, more than anything, should give buyers pause. We’re overbought. Extremely so. Tack on a looming event that has the potential to deliver instant overnight pain or gain, and I see little reason to straight-up buy the stock here.
If you want to lean long into the event, the options market provides a much more attractive alternative to piling in at these prices. Sell puts. Naked puts, to be exact. Use one contract for every 100 shares of stock you’re willing to purchase. Except instead of buying them at $44, you’ll get paid to acquire them at lower prices.
The Put Play
Such is the appeal of selling puts. If NIO treads water, heads higher or simply doesn’t fall too far from its current perch, then the put will end up expiring worthless, and you’ll be able to pocket the premium paid at inception. Alternatively, if NIO stock does see profit-taking after earnings, and falls far enough to push the put in-the-money at expiration, then you’ll be on the hook to buy 100 shares per contract.
But hey, buying at a steep discount to $44 carries less risk than jumping in now.
The Trade: Sell the December $35 puts for $2.15.
The options market is pricing in about an 80% chance that the put expires worthless, and you pocket the $215 per contract. If NIO does fall below $35, then you’ll have to buy 100 shares at a cost basis of $32.85. That represents an approximate 25% discount from Monday’s closing price.
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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