NIO Stock is going crazy. The surge in the volume of options is the best explanation.
Stock in Chinese electric vehicle maker
is on fire. While an increase in options trading volume isn’t a perfect explanation for the rally, it certainly helped stocks soar on Monday.
NIO stock (ticker: NIO) gained nearly 10% on Monday, and shares are up 28% in the past month. the
for comparison, rose 0.2% on Monday and is up 2% over the past month. Perhaps the biggest reason NIO stocks could be more volatile is call options volume, which rose nearly 200% on Monday from Friday.
Call options give their holder the right to buy a share at a fixed price. (Buying a call is a bullish approach to the underlying stock.) Brokers will sell and trade options contracts because they want to earn a commission on a trade. But brokers don’t want to be short of a call option, which means they’ll have to take a loss if the stock goes up.
One way for brokers to hedge option positions is to buy the underlying stock. If a broker writes a call option and buys the stock, they can earn the commission on the options, and if the stock rises, they can deliver the purchased stock to the option holder. In this scenario, the broker does not have to buy shares at a higher price. This process is one way that above-average call buys can cause the underlying stock to buy.
Other factors do not seem to be involved. Wall Street, for example, cannot be credited with the rally. The analysts’ average price target for NIO stock has risen about 1% over the past month and little has happened to those targets since the company released its results in late April. Thinking back at this point, the average analyst price target has risen from around $ 1 to just over $ 59 per share.
The news doesn’t appear to be a credible reason for NIO to come together either. The last post on NIO’s website was on June 1, when the company reported deliveries in May. The numbers relieved investors as the electric vehicle company maintained its second-quarter delivery forecast despite a global automotive semiconductor shortage that rocked the entire industry.
NIO shares are now up 1% year-to-date. It’s been a wild ride so far in 2021. Based on recent trade, the race will continue.
Write to Al Root at [email protected]