Update 4/15/2021: I exited my short bear call spread position on NIO 36 days before expiration, for a $0.38 debit per contract/share, a profit before fees of $0.37 per contract. Shares were trading at $35.70, down $4.37 from the entry level.
My decision to exit was based on the price reaching the as close as possible to 50%.of maximum potential profit, as required by my trading rules. The price remained below my short call strike, $44, throughout the life of the position. The entry and exit dates are shown by vertical red lines on the chart, with a horizontal gray line marking short call strike price.
Shares declined by 10.9% over nine days for a -442% annual rate. The options position produced a 97.4% return for a 3,949% annual rate.
I have entered a short bear call spread on NIO, using options that trade for the last time 45 days hence, on May 21. The premium is a $0.75 credit per contract share and the stock at the time of entry was priced at $40.07.
The implied volatility rank (IVR) stands at 31.9%.
|NIO-bear call spread||Strike||Odds||Delta|
The premium is 50% of the width of the position’s wing.
The profit zone covers a 9.8% move to the upside, with no downside limit.
The risk/reward ratio is 3:1, with maximum risk of $225 and maximum reward of $75 per contract.
Elliott wave analysis. NIO is in a 4th wave that began March 5 and internally has begun its C wave to the upside. As a 4th wave it will most likely take the form of a Flat, meaning it will be shallow. Wave 4 has already retraced about 62% of the preceding wave 3.
The next move after wave 4 will be either a 5th wave to the downside — the position is bearish and will profit all the way down — or a continuation of wave 4, in which case the price will likely stay within the same range as we’re seeing now, which is profitable.
The short call strike price, at $44, is slightly below the start of wave 3, at $53.58. That’s a risk I took to make the premium worthwhile, and with a 45-day lifespan there should be ample opportunity for any move above that to level to reverse back into the profit zone, given that my analysis shows the most likely tendency is to the downside.
By Tim Bovee, Portland, Oregon, April 6, 2021
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
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