- Mullen (MULN) stock is trapped in a trading range
- Option prices have exploded higher
- Traders and investors both should look at harvesting rich option premiums in a hedged manner
Some of the attractiveness has worn of the Mullen Automotive (NASDAQ:MULN) stock maniacal meme melt-up. Shares seemed to have found some semblance of sanity as they consolidate around the 20-day moving average. The options, however, are still priced at historically rich extremes. Time to profit from continued consolidation with a covered call strategy.
The opinions on MULN stock run the gamut. Bulls and bears both abound.
| MULN | Mullen Automotive | $2.2600 |
Believers Versus Skeptics
GS Early penned an insightful piece on InvestorPlace last week on MULN stock. The article highlighted several reasons to be hopeful about the future for Mullen Automotive.
A few days later, InvestorPlace contributor Will Ashworth wrote an analysis with an opposing viewpoint. It brought up cash flow and dilution issues that question the validity of MULN stock as ongoing concern.
The company tried to allay some of the cash burn issues with a tweet from March 28. Mullen said it expects to have over $65 million in cash and cash equivalents by month end. They also look to be in good shape for the rest of 2022. This is crucial given the ramp up of the Mullen Five Crossover.
Undoubtedly, Mullen Automotive is a polarizing stock. The true believers will always point to a bright future. The naysayers will inevitably say that the cash will run out before the product comes to fruition.
It is similar to how one can look at the recent price performance. The bulls will say the selling has gotten too extreme. MULN stock has dropped over 80% from the recent all-time highs at $13 last November.
The bears will try to make a case that the recent red-hot rally is now ridiculous. Shares have screamed higher by almost 300% off the lows near 60 cents just over a month ago.
Both the bulls and bears would be right. It all depends on perspective. This tug of war between the believers and doubters will likely continue for the foreseeable future.
My perspective, however, is from an options standpoint. I have no idea whether MULN stock is a buy or sell at current levels. I do know, however, that MULN options are a definite sell given the extraordinarily expensive option premiums.
Options Edge
The recent return of Meme Mania has been more than evident in MULN stock options. Yesterday saw over 55,000 option contracts trade. Implied volatility (IV) is still in the stratosphere at just under 200%. Just recently IV was nearly half the current levels at just above 100%.
The two option montages below highlight just how much implied volatility has popped. Important to remember that IV is just a fancy way of saying the price of the option.
On Jan. 27, MULN stock closed at $2.91. The March 2.5 calls were priced at 65 cents (120.55 IV). Those options expired in 50 days.
Fast forward to yesterday and you can see how things have gotten more expensive in Optionland. MULN stock closed at $2.35. The May 2.5 calls closed at 65 cents (199.21 IV). These options expire in 52 days.
So the options were valued at the same price even though MULN stock was 56 cents lower and the options had two days longer to expiration. 56 cents might not seem like a lot, unless it is a cheap stock like MULN. The 56 cents equates to a roughly 20% lower stock price.
Buying a stock much cheaper and selling a call option at the same price to hedge sure seems like a good idea to me. The huge spike in recent IV sets up ideally for a covered call trade in MULN stock.
How To Trade MULN Stock Now
Buy MULN stock and sell the May 2.5 calls
The trade should cost about $1.70 based on the most current closing prices ($2.35 stock price less $0.65 option price). Ideally MULN stock closes above $2.50 at May 20 expiration and the shares are called away at the $2.50 strike price for a net gain of 80 cents. This equates to a 47% return on the initial cost of $1.70.
If MULN stock is below $2.50 at May expiration, additional longer-dated calls could be sold against the stock to further harvest option premium and reduce the initial net cost.
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.
