Chinese automaker Nio (NIO) has delivered robust second-quarter earnings results that addressed worries about consumer demand in China. As a result, Wall Street has responded with a blistering run in NIO stock. In the past five trading sessions, Nio stock has gained more than 10%. It’s unlikely that the gains will continue at the current pace as the strong Q2 print is starting to become old news. However, with a vertical options spread, it’s possible to generate income on a flat-moving security. This means that, even with a neutral stance on NIO, investors can still win.
The Big Move in NIO Stock
While I remain neutral on Nio’s stock, there’s no denying that the company issued strong financial results. On Sept. 5, it reported a more favorable loss per share than anticipated. The EV maker also posted revenue of $2.4 billion, up 98.9% on a year-over-year basis. However, that sales figure slightly missed the consensus forecast of $2.46 billion.
Analysts at JPMorgan Chase (JPM) cheered the results and said that the company’s gross profit margin should improve throughout the second half of this fiscal year. The company plans to release at least four new EV models in 2025, which should prove to be a catalyst for earnings and the stock. Given the good news, many analysts are suggesting that investors Buy NIO stock.
However, before pulling the trigger, investors should consider some potential headwinds. Top investor Jonathan Weber notes that Nio is still a money-losing operation. Labeling NIO stock as one of the “riskier” investments in the EV sector, Weber gives the stock a neutral rating.
The Bull Put Spread
As stated earlier, investors can make money with a neutral stance on Nio’s stock. This can be done by employing what’s known as a bull put spread. This option strategy is known as a vertical spread. It’s called that because it involves transacting two options with the same expiration date but with different strike prices. In other words, one strike price is vertically above the other.
The goal of the bull put spread is to generate income from an option premium. The trader achieves this by selling a put option at a higher strike price. It should be noted that selling a put without owning the cash to cover the contract in the event that the buyer exercises it is risky. The trader should, therefore, buy a put option at a lower strike price to cap the potential liability.
For a bull put spread to be profitable, the underlying security typically needs to move sideways or modestly higher. It’s possible for traders to structure their put spreads so that the underlying stock must move higher. Still, most investors are better served with a balanced risk-reward profile.
A Compelling Trade
To profit from a neutral stance in NIO stock, consider selling the $5.50 put that expires on Sept. 20, 2024. On Sept. 10, the bid price of this contract was $0.26. To cap the downside risk, consider buying the $5 put, which featured an ask of $0.09. Under this setup, the breakeven price is $5.33. The maximum profit is the net income generated of $0.17 per contract, while the maximum loss comes out to $0.33.
People employing this trade will be betting that NIO stock will steadily march higher or, at the very least, stay above $5.33. Again, the company posted strong Q2 results, management is optimistic about the current quarter, and the EV maker plans to release new vehicle models. However, the news might not move NIO stock much higher as these catalysts could already be baked into the share price.
By engaging the bull put spread, traders can make money off other investors who might be swayed by the current hype surrounding Nio’s stock. Investors using this strategy are not bearish on the company. Rather, they’re not convinced that the stock will blow up again like it did after the recent earnings report.
Why It Matters
A bull put spread makes sense for investors, such as myself, who retain a neutral outlook on Nio’s stock and want to manage their investment risk.
As an example, say you believe that NIO shares will reach $5.76 by the Sept. 20 expiration date. Compared to the Sept. 10 closing price of $5.47, that would be a 5.3% move higher. By buying 100 shares of Nio stock, a speculator would earn $30.53 in profit. With the bull put spread, the trader would only earn $17 (17 cents x 100 shares).
However, if Nio’s stock falls to zero, the investor who bought $547 worth of shares would lose it all. If the same thing were to happen with a bull put spread, the loss would only be $33 (33 cents x 100 shares). That is definitely a better risk-reward profile.
Wall Street’s Take on Nio
Turning to Wall Street, NIO stock has a Moderate Buy consensus rating based on six Buys, four Holds, and one Sell assigned in the past three months. In addition, the average NIO price target is $5.97, implying 6.61% upside potential.
Conclusion: Use Options with a Hot (But Gassed) NIO Stock
While Nio’s strong Q2 financial results justified a big move higher, it’s doubtful the big run will continue in the near term. However, astute investors can still profit from a neutral stance on the stock by deploying a vertical options spread known as a bull put. In this approach, traders earn income while limiting their downside risk. Such an approach allows market participants to win, even from flat price action.
