As a technician, I heed the messages broadcast on price charts. And right now, the action in Chinese electric vehicle company, Nio (NYSE:NIO), says buy.
The pitch is straightforward. Its price trend looks better than at any time since last October. Volume patterns show steady accumulation for NIO stock. And Chinese equities have been outperforming their U.S. counterparts for six weeks.
If that weren’t enough, NIO gapped lower Wednesday after Grizzly Research released a bearish research note, but traders swarmed to buy the discount. That’s hardly the movement you’d expect if investors were overly concerned about the company.
Let’s take a closer look at each argument and map out how you might use options to increase your odds of success.
Nio Stock Chart Supports Buying Shares
The weekly time frame reveals three bullish developments. First, prices have fully retraced 2020’s meteoric rise, removing much of the fluff in its stock price. With NIO stock back on Earth, old resistance in the $11 range has turned into new support.
Second, a double-bottom pattern has formed, suggesting a trend reversal is in the cards. This is the best chance buyers have had in staging a turnaround since Nio peaked early last year.
Third, the past month’s rally has been strong enough to carry prices back above the 20-week moving average for the first time this year. This rally has momentum that its predecessors have all lacked.
The daily view shows a mature uptrend creating a higher pivot low at the rising 20-day moving average. We’ve been in a dip-buying environment since mid-May, and this week’s retreat offers another attractive entry point. Consider using Wednesday’s high of $22.28 as the trigger for new trades. On the volume front, it’s been a while since any signs of distribution have cropped up. Instead, high-volume up days litter the landscape, suggesting big buyers are entering the fray.
Nio isn’t rising on its own merits. It’s riding the coattails of a resurgence in Chinese stocks.
Chinese Stocks Are Flexing
The iShares China Large-Cap ETF (NYSEARCA:FXI) troughed in early March and has rallied 30% since. The gains have come even as the S&P 500 has continued sinking to new lows. FXI peaked well before U.S. markets, topping at $54.53 in February 2021. It went on to get cut in half, far outpacing the losses in American equities.
Just as FXI was the first to turn down, it’s now the first to turn up. It suggests the worst could be priced in for Chinese-oriented growth stocks. Part of the original reason for the bear market was the aggressive stance government regulators took against public companies. Recent news has suggested the antagonism is easing, giving buyers a reason to return.
With the recovery, FXI is now only down 7.14% on the year. Meanwhile, the S&P 500 is down 20.38%.
Sell NIO Puts to Increase your Odds
While you could buy NIO stock outright, the options market offers an exciting way to stack the odds in your favor with naked puts. The strategy is particularly attractive for Nio because of the stock’s deep liquidity, low share price, and higher volatility.
Selling put options (aka short puts or naked puts) allows you to get paid for obligating yourself to buy shares at a discount. For instance, with NIO, we could sell the August $15 put for 56 cents.
The max reward is 56 cents, but the initial margin required is only $150, translating into a beefy 30% return. And to capture the gain, you only need NIO to sit above $15 for the next month. Market odds are pricing in an 88% chance of success.
Of course, if the stock sinks, you are on the hook to acquire 100 shares at $15. To minimize the loss, consider exiting if we reach the strike price.
On the date of publication, Tyler Craig 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.