Bulls Should Approach This EV Stock With Caution

The S&P 500 Index (SPX) wrapped up the first half of the year with its worst performance since 1970, as recession fears clamber to the forefront of investor minds. One sector seems to be avoiding becoming collateral to the broader-market volatility, however. Friday morning kicked off July, as well as a slew of delivery reports from China-based electric vehicle (EV) names. For the month of June, Li Auto (LI) handed out 13,024 vehicles, Xpeng (XPEV) delivered 15,295, and Nio (NIO) saw a 60% year-over-year increase of 12,961 deliveries.

It’s more than just strong delivery numbers, though. Following the stock’s January 2021 record peak at $66.99, NIO proceeded to carve out a channel of lower lows over the next year-and-a-half, culminating in a May 12 two-year low of $11.67. Things began looking up on June 21, after the equity gapped 9.1% higher on the heels of a bull note out of BofA Global Research. Despite several days of correction, the shares of Nio stock remain above newfound support at the 120-day moving average and $21 level.

This newfound support also comes as call traders begin to circle back in on NIO. Specifically, the security just appeared on Schaeffer's Senior Quantitative Analyst Rocky White's list of names that have attracted the highest weekly options volume in the past two weeks. Per this data, 1,897,758 calls and 1,502,859 puts were traded within this two-week time period. The June 20 call was the most popular contract during this time frame, followed closely by the June 20 put in that same monthly series – indicating possible spread activity was occurring in the last month or so.

The aforementioned call popularity could be a red flag for contrarians, however. Should this optimism begin to unwind, it could weigh heavy on NIO shares. What’s more, the security is looking ripe for downgrades. Eight of the nine covering brokerage firms sport a "strong buy" recommendation.

Overall, the EV sector, like most growth plays in the last year, has been battered. That doesn't necessarily mean the time is now to jump in, as short and long term risk remains elevated and legislation dependent. It’s best to move forward with heightened caution amid the recession fears and recent inflation buzz, though buying and selling through specific methods, such as the previously mentioned spread tactic, could be wise.

The ultimate goal for a long call or put spread is still for the underlying security to rise/fall, but without the trader being "all-in" bullish or bearish. Instead, she sacrifices the unlimited profit available to the long call/put buyer in exchange for a lower cost of entry and reduced breakeven point. Also be sure to check out Schaeffer’s latest product release: Vertical Options Trader, which covers trading via call and put debit spreads.

Subscribers to Chart of the Week received this commentary on Sunday, July 3.