Certainly, some of the previous red-hot rally that propelled shares to all-time highs was overdone. A pullback was definitely warranted. The selling, however, is now getting a little overdone as well. It’s time to take a guardedly bullish stance on an oversold and under-loved Nio.
The analysts are decidedly bullish on NIO stock. Eight out of the nine analysts offering 12 month price targets have it rated as a “buy” at TipRanks. The consensus price target is $59.46 with the lowest being $37.70.
The fundamentals are looking more favorable at these prices. Nio trades at less than 6x sales on a 2022 forward basis. This is well below the 8.7x forward price-to-sales (P/S) ratio for competitor Xpeng (NYSE:XPEV) and the P/S ratio of 10.4x for Tesla (NASDAQ:TSLA).
InvestorPlace contributor Vandita Jadeja thinks NIO stock is a buy anywhere below $30. She points to the increased deliveries and production capacity as potential catalysts to push shares higher.
The Technical Take on Nio
Nio stock is getting extremely oversold on a technical basis. Its nine-day relative strength index (RSI) is nearing 25 and at the lowest levels of the past few years. Its moving average convergence divergence (MACD) is in negative territory.
Bollinger Percent B also reached negative readings, but it is beginning to strengthen. Momentum has fallen sharply. NIO stock is trading at a big discount to the 20-day moving average. When these indicators previously aligned in a similar manner, it marked significant short-term lows in the stock.
The last time NIO stock was around this price was October 13, 2020. This preceded a major upside breakout for Nio. Shares ultimately stalled out at its all-time high of $66.99.
I am not expecting that magnitude of a move now. It is a different market environment. Speculative excess has been wrung out with the recent rate-hike rancor. A rally back toward the 20-day moving average of $29.20 would be a much more realistic target.
Implied volatility (IV) in Nio stock options now sits at the 72nd percentile. This means option prices are comparatively expensive, especially when compared to the historic volatility of 61%.
That makes option selling strategies optimal when constructing trades. A buy-write strategy of buying NIO stock and hedging by selling (writing) call options makes probabilistic sense.
How to Trade NIO Stock Now
Buy NIO stock and sell the January 2023 $30 call for a $19.01 net debit.
Selling the January 2023 $30 call at $3.65 reduces the downside risk by 16.10%. There is no free lunch in trading, though. It also caps the upside gains at the short strike price of $30. But those gains would equate to a very healthy 57.81% if NIO stock closes above $30 at January 20, 2023 expiration. Standstill return (what you make if Nio goes nowhere) is 19.2%.
Long-term horizon traders and investors should consider buying a beaten-down NIO stock and selling bid-up call options.
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 makes weekly appearances on Bloomberg TV “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything volatility and option related. He has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.