Not Too Late: Make Money on Nio Stock Despite Its Recent Surge

In the sales training scene from “The Wolf of Wall Street,” morally flawed protagonist Jordan Belfort remarks that “by the time you read about it in the Wall Street Journal, it’s already too late.” Love him or hate him, Belfort has a point: generally speaking, you want to avoid betting on old news.

Take for example Chinese electric vehicle manufacturer Nio ($NIO). On Monday, NIO stock gained almost 11% of equity value. Over the trailing five sessions, shares returned just under 40%. The catalyst? Overall strong results from the company’s second-quarter earnings report combined with an upbeat outlook for forward sales and vehicles deliveries.

Here’s the problem: the market represents the valuation of anticipated events, not on historical realities. Something that has happened in the past is, by nature, a fact. In other words, there’s nothing to gamble on. Since tomorrow is an unknown, assigning a monetary value on speculation yields a risk-reward profile. Such profiles are necessary for investments to generate capital gains.

Subsequently, betting on old news is risky. Since everyone knows the reality of the event in question, it’s difficult to say with certainty whether the underlying security will rise or fall. But in lieu of taking a directional wager, one can take the easier road with options.

NIO Stock Incentivizes a Neutral Trading Position

As Zacks Investment Research pointed out, there were several bullish catalysts for NIO stock. In no particular order, they are as follows:

• Narrower-than-expected loss: NIO's loss per share was smaller than projected, showing better-than-anticipated performance.

• Revenue growth: Revenue surged 98.3% year-over-year, driven by higher delivery volumes.

• Vehicle delivery: A 143.9% increase in vehicle deliveries, with strong demand for both SUVs and sedans.

• Improved margins: Vehicle margin rose to 12.2%, and overall gross margin increased to 9.7%, reflecting lower material costs.

At the same time, the EV manufacturer didn’t get off scot-free:

• Continued losses: Despite improvement, NIO still reported a loss, and costs like selling and administrative expenses increased by 31.2%.

• Research and development cut: A 3.9% reduction in R&D costs could raise concerns about future innovation.

• Future outlook: Projected Q3 vehicle deliveries indicate only moderate growth of 10-13.7%, which might be seen as slowing momentum.

Yes, it’s fair to say that the positives outweigh the negatives. However, with NIO stock up 40% in the trailing week, there’s a likelihood that these positives have already been priced in.

Another clue that a directional wager may not be prudent is the variance between implied volatility and historical volatility. Per Barchart, the overall options chain shows that IV sits at 70.69% relative to HV of 73.43%. Put another way, the market anticipates lower price swings (either to the upside or downside) than NIO’s historical average.

Again, Belfort’s right: by the time you’re reading about it on [insert favorite finpub here], it’s already too late — for a directional wager. This juncture is arguably perfect for a bull put spread.

Setting Up the Bull Put Spread

A bull put spread is known as a multi-leg vertical options strategy. The vertical term refers to the fact that put spreads involve options of the same expiration date but with different strike prices; that is, one strike is (vertically) above the other. Structurally, traders earn income from the higher-strike sold put, while simultaneously buying the lower-strike put to hedge the liability of the underwritten derivative.

One possible idea to consider is the income generation off the options chain expiring on Sept. 20, 2024. Below is a setup to generate $47 of income while risking $53.

• Sell the $6 put at a bid of 57 cents per contract (with each contract representing 100 shares).

• Buy the $5 put at an ask of 10 cents.

• Breakeven price lands at $5.53.

• Maximum profit is 47 cents (premium received minus premium paid).

• Maximum loss is 53 cents.

• Risk-reward ratio is 1.13 to 1 (for every $1 of income received, $1.13 is at risk).

Profit and loss potential for NIO's bull put spread

With the breakeven at $5.53, that doesn’t leave much room for NIO stock to fall, which is currently trading at $5.57. However, because the general sentiment is bullish, the trade should favor the underwriter of the risk.

At this point, you might be wondering why optimistic investors don’t just buy calls? They could but again, astute market participants will read market sentiment, much like a quarterback reads the opposing defensive formation before pulling the trigger on the play.

With IV below HV, Wall Street is signaling that perhaps most of the old news has been priced in. Therefore, a neutral-to-moderately bullish strategy may make more sense.

Disclaimer:

Stock trading involves significant risks and is not suitable for every investor. The strategies and ideas discussed in this article are for informational and educational purposes only and should not be construed as financial or investment advice. Always conduct your own research or consult with a licensed financial advisor before making any investment decisions.

Please note that selling options can expose you to unlimited liability if the underlying asset moves against you. It is crucial to exercise your in-the-money bought options to offset the potential liability of your in-the-money sold options, particularly in volatile markets. Make sure you fully understand the risks and mechanics of options trading before engaging in these types of transactions.