Shares of Lucid (NASDAQ:LCID) have rallied strongly over the past few weeks in sympathy with the rest of the electric vehicle (EV) market. LCID stock once more attempted an upside break out, only to fail yet again. It is anyone’s guess whether the next move will be a bona-fide break out or continued consolidation. Still, an eventual break out is more than a distinct possibility.
Earnings and news from EV leader Tesla (NASDAQ:TSLA) likely fueled much of the recent ramp higher. Tesla has now added on over 25% since early February and has joined the $1 trillion market cap club.
LCID stock, however, has barely budged in that same time frame. Certainly Lucid has some catching up to do on a comparative basis.
With all of that in mind, let’s take a closer look at what you might expect from Lucid today.
A Technical Take on LCID Stock
Lucid stock once again struggled to break out past the major resistance level of $28. This marks the fifth time since early June that LCID has failed to push past this area.
Its MACD and momentum have turned positive, while the RSI has softened after nearing overbought readings. Shares are trading well above the 20-day moving average of $24.49.
The price action over the past two days were both reversals. LCID stock traded up to a new recent high at $28.94 only to pullback and close near the lows of the day at $27.02.
LCID continues to make a series of higher lows similar to the pattern seen 5 months ago. All in all, a mixed bag on the technical front for LCID stock.
InvestorPlace contributor Thomas Niel recently published an article talking about the difficulty Lucid Group may encounter moving higher. He felt that the next leg up in LCID may take some time.
Luckily, the options market provides a way to get paid while you wait. Implied volatility (IV) is trading at the 36th percentile while historic volatility (HV) is at just the 21st percentile. Options prices are comparatively expensive. This favors selling strategies when constructing trades.
Call volume has reached extreme levels. Nearly 380,000 calls traded yesterday versus just 70,000 puts. This pushed the put/call ratio to under 20x. That’s usually a reliable sign that call speculation is getting overdone. The at-the-money January calls have jumped to an 85 implied volatility (IV). This is a big uptick in IV from the 78 level they were priced at just a week ago.
A covered call trade is a way to position for a potential break out while hedging the downside at the same time. It makes even more sense given how frothy the call prices have become.
How To Trade Lucid Stock Now
Buy LCID stock at $27 and and sell the LCID Jan $28 calls at $4 for a $23 total net debit.
The Jan $28 calls have a 55 delta. That means the overall exposure is reduced by over half to 45 deltas long when selling the calls versus the stock. The $4 premium received provides a 14.8% downside cushion to the $27 paid for LCID stock.
The standstill return if Lucid stock goes nowhere is 17.4%.
Ideally LCID stock closes above $28 at January expiration for a 21.74% total return or 114% annualized. If LCID stock is below the $28 strike price in January, then additional calls can be sold to further reduce the initial cost of the trade.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim has appeared on PBS and the Nightly Business report, while maintaining weekly appearance on Bloomberg TV and CBOE-TV to discuss everything from volatility to LEAPs. Tim has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.