Shares of electric vehicle (EV) companies have been red hot for the past year. Since the lows of March 2020, Tesla (NASDAQ :), which typically gets the highest headlines, has returned about 550%. But with stocks currently trading near $ 700, investors are constantly looking for the next "Tesla."
Today we take a look at Nio (NYSE :), often touted as the "Tesla of China", and give and give an example of how to use it for a covered conversation. We recently discussed how investors might consider writing covered calls on their stock holdings.
Such an option strategy could help reduce the volatility of their position and provide shareholders with some protection against stock falls. Readers who are new to options may want to revisit that article before reading this post.
Nio
Intraday Price: $ 44.95
52 Week Range: $ 2.11 – $ 66.99
Price change 1 year: Up about 1,340%
Shanghai-based Nio, founded in 2014, was one of the early entrants to China's premium EV market . The company designs and markets self-driving electric cars. In September 2018, its share was made public in the US as an American Depositary Receipt (ADR) at an opening price of $ 6.
In the two days after listing, shares of Nio reached $ 13.80. From then until about a year ago, his fortunes were mixed at best. But significant investor interest has sparked a spectacular rally in EV and green energy stocks since the lows of March 2020.
On January 11, Nio's stock hit a record high of $ 66.99. Since then, profit taking has started. On March 5, shares went below $ 32. They are down about 8% year-to-date (YTD). In the past week, however, investors have returned, pushing the stock towards the $ 45 level in a matter of days. It's a very volatile stock.
Currently, approximately 6.3% of all cars sold in China are electric vehicles. Recent statistics show that EVs manufactured by Warren Buffett-backed BYD Co (OTC 🙂 (OTC :)) are leading the market. Tesla sales follow, then Volkswagen (DE 🙂 (OTC :)), SAIC Motor Corp (SS 🙂 and General Motors (NYSE :).
Nio announced the results on March 1. The group currently sells its three car models exclusively in China. In the fourth quarter, it delivered 17,353 vehicles. For 2020, the total number of deliveries was 43,728. A year ago there were 20,565.
Vehicle sales were $ 946 million, up 130% from the fourth quarter of 2019. Sales were $ 1 billion, up 133% year-over-year (year-over-year). Adjusted non-GAAP net loss of $ 203.2 million translated to a net loss of 14 cents per diluted share. The loss was greater than expected. Cash and cash equivalents were $ 6.5 billion at December 31, 2020.
" The strong momentum continued into 2021 as we achieved a historic monthly delivery of 7,225 vehicles in January and a resilient delivery of 5,578 vehicles in February, representing a strong 352% and 689 % year-on-year, annual growth, ”said William Bin Li, CEO of Nio.
However, there is currently a global shortage of chips. That is why the company warned that it would have to reduce its monthly production capacity from 10,000 to 7,500 vehicles in the second quarter. This uncertainty has contributed to the recent volatility in NIO stocks.
Coupled with investors' nervousness about rising US Treasury yields, a search for safer investments could be in the cards in the coming weeks. Against such a background, a covered call could be suitable for some Nio investors.
Covered Calls on NIO Stocks
For every 100 shares held, the strategy requires the trader to sell one call option with an expiration date sometime in the future.
Intraday Tuesday, NIO stock traded at $ 44.95. That is why we use this price for this article.
A stock option contract on Nio is the option to buy (or sell) 100 shares.
Investors who believe that short-term profits could be taken soon, could use a somewhat in-the-money (ITM) backed call. A call option is ITM if the market price (here $ 44.95) is higher than the strike price ($ 44.0).
Thus, the investor would buy (or already own) 100 Nio shares for $ 44.95 and simultaneously sell an April 16, 2021 NIO call option with 44 strikeouts. This option is currently being offered at a price (or premium) of $ 4.85.
A buyer of an option would be required to pay $ 4.85 x 100 (or $ 485) as a premium to the seller of the option. This call option will stop trading on Friday April 16, 2021.
This premium amount belongs to the option writer (seller) no matter what happens in the future, for example at maturity. The 44 strike offers more downside protection than a phone call (ATM) or out-of-the-money (OTM).
Assuming a trader entered into this covered call trade at $ 44.95, the maximum return on expiration would be $ 390, i.e. $ 485 – (($ 44.95 – $ 44.0 ) x 100), excluding trade commissions and fees.
] Uncontrolled Covered Call Risk / Reward Profile
The maximum profit of an ITM covered call is equal to the extrinsic value of the short call option.
The intrinsic value would be the tangible value of the option if it were exercised now. Thus, the intrinsic value of our NIO call option is ($ 44.95 – $ 44.0) X 100, or $ 95.
The extrinsic value, on the other hand, is the difference between the market price of an option (or its premium) and its intrinsic price. In this case, the extrinsic value would be $ 390, i.e. ($ 485 – $ 95). Extrinsic value is also called time value.
The trader realizes this $ 390 profit as long as the price of NIO stock at maturity remains above the strike price of the call option (i.e. $ 44).
At maturity, if the stock closes below the strike price, the option would not be exercised, but would instead expire worthlessly. Subsequently, the shareholder with the covered call position receives the shares and the money (premium) that he / she paid for the sale of the option.
At maturity, this transaction would break even at an NIO stock price of $ 40.10 (i.e., $ 44.0 – $ 3.90), excluding trading fees and expenses.
Another way to think of this breakeven price is to subtract the call option premium ($ 4.85) from the underlying Nio stock price when we initiated the covered call (i.e. $ 44.95).
On April 16, if NIO shares close below $ 40.1, the transaction would begin to lose money within this covered call setup. Thus, by selling the covered call, the investor has some protection against a potential loss in the event of a fall in the underlying stock. In theory, the price of a stock could drop to $ 0.
What if Nio Stock hits a new record?
As we noted in previous articles, such a covered call would increase the upside profit potential. The risk of not fully participating in the potential appreciation of the Nio share would not appeal to everyone. However, within their risk / return profiles, others may find that acceptable in exchange for the premium received.
For example, if Nio's stock hit a new high in 2021 and close at $ 70 on April 16, the trader's maximum return would still be $ 390. In that case, the option would be deep ITM and likely exercised. A brokerage fee may also be charged if the shares are called away.
As part of the exit strategy, the trader could also consider rolling such a deep ITM call option. The trader could potentially buy back the 44 call before it expires on April 16. Depending on his / her opinion and objectives regarding the underlying NIO stock, he / she might consider starting a different covered call position. In other words, the trader could potentially roll out to a May 21 maturity call with an appropriate strike.
Bottom Line
Nio shares have been on fire for the past year, and over the long term, many analysts are optimistic about the company's outlook. However, given recent significant gains and volatility in broader markets, Nio stock could take a break at the end of the first quarter. Wild swings in price could accompany sideways consolidation.
The exact timing in the marketplace at which NIO stocks could take a breather is difficult to determine, even for professional traders. But options strategies provide tools that can prepare for sideways moves or even price declines, especially around the earnings release date.
We consider covered call options as a possible way to generate additional income from your equity portfolio. Such a strategy also helps reduce portfolio volatility. Interested investors might consider expanding their knowledge base.
