The Street’s obsession with electric vehicle stocks continues as we head into the last week of the year. Nio (NYSE:NIO), Workhorse (NASDAQ:WKHS), and Tesla (NASDAQ:TSLA) continue to light up the screens with heavy volume and spectator interest. But while the latter two rallied ahead of Christmas, Nio stock cooled. The dip is an opportunity to deploy bullish trades from lower prices.
Let’s explore the recent cooling theme a bit more. The pullback was only three days, but NIO has essentially traveled sideways ever since the beginning of November.
Instead of complaining about the trajectory shift, fanboys should be embracing it. Resting periods like this go by many names like congestion, consolidation, or basing. Simply put, they create a more sustainable trend. Nio stock’s flight path had gone parabolic and needed a breather. When future gains are pulled too far forward, it sets prices up for sharper correction if disappointing earnings ever arise.
Pausing periods like the past two months allow support zones to build while creating easier entry points for would-be buyers.
Nio Stock Charts
The easiest way to see Nio’s meteoric ascent and desperate need for the current bout of digestion is with the weekly time frame. 2020 was the year of a great awakening. The Chinese electric carmaker entered the year in relative obscurity, but it sure isn’t leaving that way. The hype train turned into a rocket ship and took prices along with it.
To wit: prices began the year at $3.83 and are ending it just shy of $50.
Forgive me, then, for lacking sympathy for shareholders disgruntled by the recent chop. They’ve been so spoiled by instant gains and weekly launches that a few months of chop seems downright bearish.
But it’s not — it’s healthy. And, it likely prevents a much larger correction later had the vertical climb continued. I’d peg support at $40 as the key level to watch on the larger time frame. Breaching it could spark a quick drop to $30.
The $40 zone is also significant on the daily chart because it currently hosts the 50-day moving average. We’ve been trending above it ever since the ascent began in earnest mid-year. Breaking below it would mark a bearish change in character.
With prices currently perched at near $45, we’re essentially in the middle of the recent trading range. While this does make directional trades more difficult, I could still see using a push above the recent pivot high of $50 as a logical trigger for new bullish entries.
While Nio remains in consolidation mode, I prefer options trades that generate gains from time decay.
Pulling Cash Flow with Short Puts
The two simplest strategies to pull profits from time decay are covered calls and short puts. The former requires you to own stock, the latter doesn’t. Traders wielding smaller accounts or simply wanting to keep costs down prefer the short put route, so that’s the one we’re focusing on today. Nio’s relatively cheap share price also works to this trade’s advantage because it keeps the margin requirement minimal.
When selling puts, you get paid for your willingness to buy shares at a discount to the current price. Here’s the one I prefer right now.
The Trade: Sell the February $30 put for $1.10.
If NIO stock is above $30 at expiration, then the put will expire, and you’ll pocket the $110 per contract received at trade entry. On the other hand, if the stock sinks below $30, then you’ll be obligated to buy 100 shares at an effective purchase price of $28.90.
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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