Here’s a Smarter Way to Chase Nio Stock’s Unusual Options Activity

You don’t always need to take a directional wager — that’s a common trap that newbie retail investors fall into. In much the same way that football teams very rarely go for it on fourth down, most times, it’s better to punt the ball and regroup. That may be the prudent approach with Chinese electric vehicle manufacturer Nio (NIO).

To be sure, NIO stock is one of the most exciting opportunities in the market right now. On Monday, shares gained just under 11%. In the past five sessions, stakeholders enjoyed a return of almost 40%. Of course, the catalyst stemmed from encouraging developments tied to the company’s second-quarter earnings report.

According to Barchart content partner Zacks Investment Research, Nio posted a loss per share of 34 cents, narrower than analysts’ consensus view of 46 cents in the red. Also, the EV manufacturer incurred a loss of 51 cents in the year-ago quarter. In addition, the company generated revenue of $2.4 billion, jumping above the expert estimate of $2.35 billion.

If that wasn’t enough, Nio delivered 57,373 vehicles in Q2, up 143.9% on a year-over-year basis. And revenue generated from vehicle sales reached $2.15 billion, up 117.8% YOY.

Now, not every news item was positive. Selling, general and administrative costs jumped 31.2% YOY to $517 million. Research and development costs declined by 3.9% to $442.9 million, possibly raising concerns about future innovation.

Still, the net outcome of the Q2 report was resoundingly positive. Here’s the thing, though: NIO stock and its bullishness represent a known commodity.

Smart Money Bets on NIO Stock But Will It Move Resoundingly Higher?

To be sure, the smart money appears to be betting big on NIO stock. The first clue stems from the unusual options volume screener.

On Monday, the data interface — which showcases aberrant trading activity for derivative contracts relative to historical norms — shows that total volume hit 408,383 contracts against an open interest reading of 2.55 million contracts. Compared to the trailing month average, Monday’s volume reading represented a 186.81% lift.

Moreover, the breakdown of the individual transactions is telling: call volume hit 313,011 contracts while put volume was only 95,372. This pairing yielded a put/call volume ratio of 0.30, seemingly favoring the bulls.

To get a better read, you can turn to Barchart’s options flow screener, which shows that net trade sentiment stands at $338,500, favoring the bulls. Specifically, total premiums of options with bearish sentiment was $-769,300 while premiums of options with bullish sentiment hit $1.11 million.

Still, it’s risky to place a huge directional wager to the upside on NIO stock. The reason? As stated earlier, you’re reading about the robust Q2 earnings report on your favorite finpub (which should be Barchart!). And that means if you’re reading about it, millions across the world have done the same.

Now, I would assume that NIO stock has the substance to keep walking along a northward trajectory. But I’m not entirely convinced that buying far out-the-money calls (as an example) is the most prudent choice. Instead, a neutral to moderately bullish strategy may be more appropriate and that’s where the bull call spread comes into play.

A Vertical Spread Seems More Reasonable

One of the advantages of being a Barchart member is that the resource’s algorithm does all the grunt work for you. It’s your job, then, to consider the best idea based on your risk-reward profile. An intriguing opportunity lies in a better-than-50/50 probability on a vertical spread for put options expiring on Sept. 20, 2024.

As a quick note, bull put spreads are called “vertical” because they typically involve options of the same expiration date but with different strike prices; more specifically, the sold put features a higher strike price (i.e. is vertically above) than the bought put, which will have a lower strike.

Interestingly, Barchart identified the below transaction, which offers a nice balance between risk and reward.

• Sell the $5.50 put at a bid of 25 cents per contract.
• Buy the $5 put at an ask of 10 cents.
• Breakeven comes in at $5.35. Should NIO stock fall below this point, the trade will incur losses.
• Maximum profit from the net premium gained is 15 cents per contract.
• Maximum loss is capped at 35 cents.
• Risk-reward ratio is 2.33 to 1 (for every $1 of income generated, $2.33 is at risk).

Moreover, Barchart notes that the breakeven probability of this vertical spread stands at 61.4%. Essentially, there’s a good chance that the trader making this transaction will walk away with the cost of the action covered and lose no money. Higher BE generally equates to a greater success rate for the option strategy but at the cost of a lower reward.

With this trade, you would be risking $35 (35 cents x 100 shares) to get $15 (15 cents x 100 shares). That’s not a bad split as far as vertical spreads are concerned. This trade is especially attractive if you believe that NIO stock will keep moving higher but not by a large magnitude.

With so much bullishness already baked in, a neutral options trade versus a directional wager seems prudent.

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.