Shares of Chinese electric car maker Nio (NYSE:NIO) have finally succumbed to a long-anticipated pullback. Nio stock reached a high of $57.2 on November 24 before dropping by nearly a third to trade well under $40 just a week later. NIO has since recovered some of the losses, closing at $43.04 on Friday.
Certainly some of the drop was warranted, given that Nio stock has moved higher by well over 1000% since the beginning of the year. However, the company continued handily beating delivery expectations. November was the fourth straight month that Nio posted record number of cars delivered. It also marked a more-than-100% year-over-year increase.
Analysts evidently liked what they saw in the most recent earnings report on November 17. Deutsche Bank and JPMorgan both raised their price targets to $50. Bank Of America more than doubled their previous price target, going from $23 to $54.70. Credit Suisse likewise more than doubled their price target, from $25 to $60.
The average price target for Nio stock now stands at $49.01. The lowest price target is $30, while the highest is $60.
InvestorPlace contributor Luke Lango also raised his price target on November 17, from $60 to $150, albeit on a much longer time frame. He believes Nio will become the dominant player in the rapidly expanding electric vehicle (EV) marketplace in China. Mr. Lango went on to say he looks for Nio to begin to grab international share as well.
The Technical View On NIO Stock
Nio stock is getting oversold on a technical basis. 9 day RSI is at its lowest levels in the past six months. MACD has crashed below 1 and is also at a half-year low. Momentum has turned negative and is nearing a recent trough.
Source: The thinkorswim® platform from TD Ameritrade
There is major support around $39.50 which has held twice. The 50-day moving average of $34.67 should also provide additional downside support.
I had a more bearish outlook in my previous analysis of NIO back on November 24. Shares were very overbought on a technical basis and losing momentum after a monster move higher. I recommended selling the Jan $65/$70 bear call spread at that time, which worked out well. But since then, Nio stock has pulled back over 15% and my outlook has changed — because price does matter.
Implied volatility (IV) is still very elevated on Nio stock options. This means option prices are comparatively expensive, which favors option-selling strategies when constructing trades. So to position to be a buyer on a further drop, selling a bullish out-of-the-money put spread makes sense. It also hedges the previous bear call spread from November 24 — effectively turning that trade into an iron condor.
Here’s How To Trade Nio Stock
Sell NIO Jan $31/ $26 put spread for $1.00 net credit.
Maximum gain on the trade is $100 per spread, with maximum risk of $400 per spread. Return on risk is 25%. The short $31 strike price provides a 27.9% downside cushion cushion to the $43.04 closing price of Nio stock. The spread expires before the next earnings report due in mid-February, which eliminates the potential earnings risk.
The $31 strike is also near the lowest analyst price target of $30. My previous short call strike of $65 is well above the highest analyst price objective of $60. Look for Nio stock to remain between these two strikes over the coming weeks.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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