Shares of Chinese Electric Vehicle (EV) maker Nio (NYSE:NIO) look to have finally found some footing. NIO stock had fallen over 25% from the recent highs near $43 in late November before bouncing off $31.50 support. Most of the carnage was due to ongoing concerns about the Chinese government’s restrictive policies.
However, the selling has come too far, too fast. Time to look to become a buyer of NIO stock on any further weakness.
InvestorPlace Contributor Faisal Humayun recently took a deeper dive into fundamentals. He cited many reasons why he felt 2022 would be a bullish year for Nio stock. Mr. Humayun noted the increasing margins along with upcoming EV launches could both be positive catalysts to drive Nio higher over the next year.
Certainly the analysts that cover NIO stock agree with Mr. Humayun. NIO is rated a strong buy with an average price target of $60.67. The lowest 12 month price target for the nine analysts is $45 — still a very respectable 33% upside from the Dec. 13, closing price of $33.66 for NIO stock.
A Technical Take On NIO Stock
Nio is looking quite well on a technical basis. 9-day relative strength index (RSI) dipped below 25 but has since turned higher. Moving average convergence divergence (MACD) also reached recent lows before strengthening as well. Bollinger Percent B (BB %B) got to the most negative levels of the past year before regaining positive ground. Implied volatility spiked higher but has tempered, albeit at still high readings. Shares are currently trading at a big discount to the 20-day moving average.
The last two times all these indicators aligned in a similar fashion marked significant lows in NIO stock (highlighted in the chart). I expect the same to happen this time around as well.
Last Wednesday saw a key reversal day with NIO stock making new recent lows at $29.66 intra-day. Nio broke through the major support level of $31.50 only subsequently to pivot and close higher on the day. Just as importantly, it also closed back above the $31.50 support level.
This type of price action many times indicates that the sellers have become exhausted and that the buyers have taken control. It is an even more powerful signal given that it took place at major support following a sharp sell-off.
I am still a little cautious on Nio and the overall market. So instead of jumping in now, I am using an option spread strategy by selling an out-of-the money bullish put spread.
Implied volatility (IV) has subsided somewhat but remains at the 49th percentile. This makes selling strategies still very viable when constructing trades. So to position to be a buyer of NIO on even further weakness, the bullish put spread makes probabilistic sense. Plus you get paid now to be a potential buyer later. All in a risk-defined manner.
How To Trade NIO Now
Sell the NIO Jun $25/$22.5o put spread for a 50-cent net credit or better.
Maximum gain on the trade is $50 per spread. Maximum risk is $2 per spread. Return on risk is 25%.
The short $25 strike price provides a 34.64% downside cushion to the $33.66 Dec. 13 closing price for NIO Stock. It is also well below the major support area at $31.50.
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.