Nio Inc (NYSE: NIO) found its share price rocketing higher on Tuesday as bulls jumped on the shares and levering up with long call options. The breakout came following a big turnaround by an analyst that has been a detractor for the company. While the upgrade and price target increase didn’t raise the bar any higher than it’s currently trading, it’s the change of heart that has led to the price surge and a recognition of the opportunity.
China is fast becoming a major player in the auto industry through the fast adoption of electric vehicles (EV). According to Statista, 32% of cars produced worldwide come out of China. While most developed countries are producing fewer cars since 2014, China has seen a 7.2% increase over that period. China nearly produces more cars in 2019 that Japan, Germany, India, South Korea and the U.S. combined. That’s pretty crazy to think about and it’s disturbing to see the U.S. experience a 40.9% decline in auto production from 2014 to 2019 and only producing the sixth-most cars of any country in the world.
On Monday, the price of NIO rocketed nearly 20% higher and broke out of a symmetrical triangle chart formation. The breakout in the share price was accompanied by substantial volume on both the stock and the option. The move was helped by a significant upgrade at UBS from a sell recommendation to a neutral. The $16.30 price target has already been achieved, but the change of heart is significant for the company.
The overall option volume was nearly five times the averagewith 44% of the calls getting filled at the ask and 42% of the puts getting filled at the bid price. Overall, the activity is skewed more bullish with most of the bullish option interest falling on the 28 AUG 20 expiration.
Action to Take: The over 30,000 contracts traded on the $20 strike price against an open interest of 3.263 is reflection of some of the expected movement by the end of the week.
Speculators may want to consider using the strike skew of the October expiration to structure an out-of-the-money long call vertical spread. The 16 OCT 20 19/21 long call vertical can be bought for around $0.60 or less.