The nascent uptrend in Nio (NYSE:NIO) stock suffered its first setback with this month’s steep pullback. Spectators are watching with keen interest to see if bulls emerge to buy the dip.
The price action provides some reason for optimism in NIO stock, but thus far, the bounce attempt has failed to achieve liftoff.
Meanwhile, the next earnings report looms on Aug. 3 as a potential X factor for the current pattern’s resolution.
In today’s message, we’re going to take a fresh look at Nio’s price trend, identify the key price thresholds that demand watching, and map out a trade idea for those willing to bet the red-hot electric vehicle company can maintain its recent gains.
Here are a few trade metrics to mull over for the options strategy I’ll reveal below:
- 87% probability of profit
- 13% return on initial margin
- Requires NIO stock to fall 14% to yield a loss at expiration
NIO Stock Chart
The weekly chart provides a big picture view of Nio’s post-pandemic explosion and subsequent halving. The percentage gain from trough to peak is other-worldly and virtually impossible to repeat. This year brought much-needed profit-taking to ease the overbought pressures. The descent cut prices in half, thereby providing a much more palatable entry for spectators willing to bet on growth’s return.
Those waiting for bullish patterns to emerge before pouncing finally received a signal last month when prices broke above resistance to turn the weekly and daily trends back up. Last week’s pullback gave us the first dip-buying opportunity of the new uptrend. Despite the weakness, we are still above the 20-week and 50-week moving averages.
On the daily time frame, some damage was done during last week’s retreat. The descent was steep enough to pull prices beneath the 20-day moving average, which marks a small victory for bears. However, the dip’s depth wasn’t ideal and leads me to favor a less aggressively bullish strategy. That way, if prices don’t immediately snap higher, we can still generate a profit.
If the weakness does persist, there are several potential support zones beneath. In addition to prior pivot lows, we also have the 50-day and 200-day moving averages. And then there’s also the 20-week and 50-week moving averages. These should provide multiple chances for buyers to step in to defend the uptrend.
Short Puts Beckon
Nio is scheduled to report its next quarterly earnings on Aug. 3. To sidestep any nasty surprises, I will structure an options trade with contracts that expire on July 30. Naked puts work particularly well with NIO stock due to its lower share price and higher volatility. The low cost translates into a small margin requirement. And the higher volatility creates juicy premiums. Together, this generates a higher potential return on investment.
When selling a put, you get paid to obligate yourself to buy 100 shares of stock at the strike price. If you’re a willing buyer of NIO at a steep discount, this could be a great outcome. And if you’re not, well, you can get stopped out if prices fall below your strike.
The Trade: Sell the 30 July $38.50 put for 50 cents per share.
If the stock sits above $38.50 in two weeks, you will capture the $50 per contract. The initial margin required is only $386, bringing your potential return on investment to 13%. As mentioned above, the probability of profit is 87%.
On the date of publication, Tyler Craig held LONG positions in NIO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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