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Ranking among the stars of the equities market during the post-pandemic surge, Chinese electric vehicle manufacturer Nio (NIO) looks set to print a sizable loss this year. Down more than 20% since the January opener, NIO stock happened to suffer a 50% haircut since the close of the Aug. 3 session.
Not necessarily helping to comprehensively assuage concerns was the company’s third-quarter earnings print. To be sure, Nio rang up sales of $2.6 billion, representing a 47% year-over-year lift. Also, deliveries jumped 75% YOY and gained 136% against the prior quarter sequentially. That was huge because deliveries had started to fade in recent quarters.
Still, the vehicle margin of 11% – while improved from 6% in Q2 – was down from 16.4% in the year-ago quarter. Further, gross margin sat at 8% in the most recent quarter, down conspicuously from the 13.3% recorded in Q3 2022. Fundamentally, these metrics suggest that wider economic pressures, along with the EV sector price war, have taken their toll on Nio.
Indeed, the Barchart Technical Opinion indicator rates NIO stock a 72% strong sell. And while the analyst consensus view comes in as a moderate buy, the assessment itself is rather split: four strong buys, one moderate buy and six holds. A couple more pensive ratings and NIO won’t look that appealing from an expert standpoint.
Still, it’s difficult to discount the EV manufacturer given its popularity among retail investors. Based on public forums, NIO stock remains one of the most heavily discussed ideas. Interestingly, on Monday, shares gained slightly over 4%. While it’s too early to call, we might be looking at a near-term speculative rally.
Contrarian Bulls Look to Penalize NIO Stock Pessimists
Curiously, when looking at Barchart’s screener for unusual stock options volume, NIO stock represented one of Monday’s highlights – that is, for generating overall volume lower than normal. However, this stat alone obscures the fact that there are individual contracts within the NIO options chain worth watching closely.
One in particular stands out, the Feb 16 ’24 8.00 Call. On Dec. 7, Fintel’s options flow data – which exclusively filters for big block transactions likely made by institutions – showed a heavy concentration of sold (written) contracts of this call option. At the end of that session, volume totaled 11,017 contracts, a hefty wager.
For those unfamiliar with the lexicon, at face value (assuming no integration of complex multi-tiered strategies), traders placing this bet are assuming that by the expiration date of Feb. 16 of next year, NIO stock will not materially rise above the $8 strike price. If NIO fails to exceed this level, then the call seller (writer) will collect maximum premium, which in total amounted to $128,000.
On the other side of the transaction, those who believe that NIO stock can hit $8 before expiration collectively paid the $128,000 premium. It’s a test of will and conviction. However, for the risk underwriter, an added concern exists about covering the bearish bet. If the position is naked – that is, the call writer wrote the calls without owning the underlying security – it exposes the bear to unlimited liability.
Understanding this, NIO stock pessimists who underwrote the risk will be sweating until the February expiration date. In fact, the delta of the target call option sat at 48% on Dec. 7, then slipped to 45.8% the next day. That’s good for the call writer as it indicates that the underlying stock is moving away from the strike price.
However, with the big move up on Monday, delta for the call jumped to 51%. That’s great news for call holders but not so much for call writers. To add another wrinkle to the narrative, open interest for this option now stands at 26,126 contracts, leaving a huge vulnerability for pessimists if NIO stock soars past $8.
A Warning Sign Against Excessive Bearish Speculation
Truth be told, I’m neutral on NIO stock over the intermediate to long term. While the company brings many positives to the table, including leadership in EV technology and a focus on the user experience, the upstart also suffers from fierce competition. And that competition will almost certainly apply pressure to the margins, which already is a questionable topic.
However, I simultaneously lack the conviction to place excessively bearish wagers against NIO stock. For anyone who happens to be bearish on the Chinese EV maker, it’s more sensible to purchase put options. With buying options, your risk is limited only to what you put into the derivatives.
Selling options, especially selling call options, opens a can of worms. These folks are obligated to fulfill the terms of the contract upon exercise. For call writers, that means selling the underlying security at the listed strike price. However, if you don’t own the security in question, you may find yourself forced to buy back the stock at increasingly higher prices, only to sell shares at the (lower) strike price.
What’s worse, savvy contrarians may be aware of your bearish bets through data points like options flow. Therefore, NIO stock could be interesting for bullish speculators until Feb. 16.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
