October’s selling onslaught created a severe 50% drop for Workhorse Group (NASDAQ:WKHS). The ugly trip into bear country shook weak hands out of WKHS stock. Their flight was understandable. Not many shareholders have the intestinal fortitude to withstand a halving of their position.
But their departure was premature. Workhorse is back to its rocket ship-like ways and just topped off a week that saw the Ohio-based technology company surge 34%.
Typically moves of this magnitude are sparked by an earnings announcement or equivalent catalyst. But WKHS isn’t your typical stock. It doesn’t need a quarterly report to usher in volatility, thank you very much. It’s an electric vehicle (EV) stock adored by the momentum crowd.
Wall Street Hearts EV Stocks
Wall Street is in the midst of a love affair with EV stocks. Their affection has driven the likes of Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), and Workhorse Group to the moon in 2020. And there’s still six weeks to go.
All of them exhibit multiple momentum stock characteristics. Their track record of breakouts and massive upside follow-through is second to none. The excessive volatility has delivered quick profits but a few gut-wrenching drops along the way — particularly for WKHS stock.
Finally, options premiums are juicy and create compelling opportunities for traders looking to use derivatives as their vehicle for playing.
Workhorse’s price chart just blasted back above the 50-day moving average, officially placing it back into bull territory. Volume patterns look very constructive, and the entire industry is on fire right now. That, coupled with the usual year-end tailwind boosting equities leaves me optimistic that WKHS could return to and potentially exceed its record high of $30.99.
To capitalize, I have two trade ideas to consider.
My Two Favorite WKHS Stock Options Trades
The sky-high premiums in options land are more than justified given the stock’s wild nature. It allows for some exciting trade ideas if you’re looking for either a lower cost/limited risk alternative to buying shares or if you desire a higher probability of profit.
Keep in mind, the baseline odds of purchasing stock is 50-50. It’s a coinflip in the short run. Part of the appeal of using options is to shift the odds in your favor, to create a position with a probability of profit well north of 50%. For a low-priced ticker like WKHS, naked puts are my instrument of choice for accomplishing this.
Suppose, for instance, that you’re comfortable wagering Workhorse will remain above $19 moving into year-end. As long as it doesn’t decline more than 26% from Friday’s close, your bet will payout.
Naked Put: Sell the December $19 put for 95 cents.
The max gain is limited to the initial $95 received per contract. The potential loss arises from the obligation you’re under by selling the put. In exchange for getting paid the 95 cents per share, you promise to buy shares at the strike of $19 if the put sits in-the-money at expiration. Because of the 95 cent premium, however, your actual cost will be $18.05.
If that’s an acceptable proposition, then let the short put ride to expiration. Otherwise, you could repurchase it to exit if WKHS stock falls below $19. The initial margin required is only around $200, so this naked put play offers an attractive return on the initial investment of nearly 50%.
The second idea amps up the return but requires Workhorse to rise past $30 by January.
Bull Call: Buy the January $25/$30 call vertical for $1.65.
The risk is limited to $1.65 and will be lost if the stock is below $25 at expiration. On the upside, you have the potential to capture a profit of $3.35 if it rises past $30. That translates into a return of 203%.
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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