How To Profit In Nio With A Straddle Option

Volatility has dropped in the last week, with the Cboe Market Volatility Index, or the VIX, currently trading below 16. That approaches the lowest levels that we’ve seen in the last 12 months. Meanwhile, Nio stock currently shows an implied volatility percentile of 0%.


That could mean it’s a good time to be a buyer of volatility in Nio (NIO).

Most of the trades we’ve looked at recently, such as this one in Alibaba (BABA), and this one in Starbucks (SBUX), will benefit when implied volatility drops or remains low.

When volatility plunges, it’s a good idea to add some trades that will benefit when implied volatility rises.

Watch The Implied Volatility

One way to find potential trade candidates: look at the implied volatility percentile of a stock. This measures where the current level of implied volatility sits compared to all readings in the last 12 months.

An implied volatility percentile of 0% means that the current level of implied volatility is the lowest level seen in the last 12 months.

We can do this via a strategy called a long straddle. Construct it through buying an at-the-money call option and an-at-the-money put.

Buying at-the-money options can be expensive. They will also suffer from time decay, meaning that they will lose a little bit of value with each day that passes if the stock doesn’t make a big move.

Nio Stock: Setting Up The Options Straddle

Major Chinese EV makers reported monthly sales on Wednesday. Such news, as well as quarterly results, can act as a catalyst for increased volatility in Nio stock and its peers.

With a long straddle, the further out in time the trade is placed, the slower the time decay, but the options are more expensive and require more capital.

I usually go out about three to four months for long straddles and then look to close the trade halfway through if the profit target or stop loss have not been hit. This helps to minimize the time decay, which gets more severe the closer the trade gets to expiration.

You can set up a long straddle option trade for Nio stock by buying a December-expiration 40 strike monthly call option and monthly put. The call traded recently around $4.60, and the put around $5.30.

When we add the two together, the total cost of the trade would be around $9.90 per contract, or $990. This is the total amount of risk in the trade and the maximum that could be lost.

How To Manage The Straddle Trade

The break-even prices are calculated by taking the strike price plus and minus the cost of the straddle. That gives us break-even prices of 30.10 and 49.90. But profits can be made with a smaller move if the move comes earlier in the trade.

For example, the estimated break-even prices at the end of September are 33 and 46.

Changes to implied volatility will significantly impact this trade and the interim break-even prices. So, make sure you have a solid understanding of volatility before placing a trade like this.

The worst-case scenario with this Nio long straddle? A stable stock price that would see the call and put slowly lose value each day. For a long straddle, I usually set a stop loss at around 20% of capital at risk, or around $200.

I also wouldn’t hold this trade for more than three to four weeks.

Beyond Nio Stock: Watch This EV Play Too

Tesla (TSLA) is another EV stock showing a low implied volatility rank.

Please remember that options are risky, and investors can lose 100% of their investment.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.


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