NKLA - Nikola: Looking For Shares To Remain Above $2 Over The Next 30 Days

Summary

• The stock's technicals have been encouraging of late as earnings projections have stabilized.
• The lack of earnings and negative profitability means we are not interested in a long-term hold.
• Nikola's options interest us however due to the stock's high implied volatility and strong options liquidity (42k).

Intro

When we pull up a technical chart of Nikola Corporation (NKLA), the question which comes to mind is whether this present consolidation shares have been undergoing will be more of the same (resulting in more lower lows) or if indeed shares have finally bottomed. Nikola went public some years ago and managed to rally well above its set IPO price for many months post the float. However, after that initial spike in the Summer of 2020, shares of the EV company have consistently made lower lows which have disgruntled long-term holders, to say the least. The short -interest ratio remains very high at close to 30% as lower lows have been the norm for quite some time now.

From a technical perspective, however, the taking out of that down-cycle trend line depicted below definitely provides room for encouragement. Why? Because often the market (essentially the stock's share-price action) is the best barometer on where shares are headed, at least over the near term. To put it another way, we believe that every piece of information that could possibly affect Nikola's business has been fully embedded in the price at this stage.

Many Unknowns

Why do we state this? Well considering Nikola's over 1.3 billion dollar market cap, its sales remain pretty much meaningless. Furthermore, the company remains unprofitable although murmurs of bankruptcy are unfounded at this stage at least over the near term given its ability to issue stock and its $319+ million of cash on the balance sheet at the end of the company's most recent quarter.

However, knowing when Nikola's electric trucks will gain traction or when commercial deliveries of the company's fuel cell trucks will go mainstream remain very difficult questions to answer at this stage. Moreover, with inflation remaining at stubbornly high levels, Nikola's costs are another area that will be hard to predict say 12 to 18 months from now.

What we have seen, however, is some stabilization regarding Nikola's forward-looking sales and earnings estimates in upcoming quarters. The upcoming -$0.54 EPS estimate for Q4, for example, has managed to stay pretty much flat over the past thirty days. Furthermore, revenues are still set to top $30 million in the quarter followed by $43+ million in Q1 of next year. We believe as long as revenues keep on growing at a healthy clip (270%+ expected next year), the market will not unduly punish the stock even in the event of bottom-line profitability being non-existent for some time to come. The reason being is that sustained top-line growth will give the market a line of sight to future profitability. Therefore as long as present trends continue, downside risk should remain pretty limited going forward.

Options Play

Therefore considering NKLA's options liquidity as well as its above-average level of implied volatility (52-week IV Rank of 70), we believe the sale of the regular $2 March put gives us a high probability of profit (79%) and a low breakeven ($1.78 per share) which limits our risk in this play. Investors should consider that the breakeven price or cost-basis of this position comes in almost 30% lower than the prevailing share price of NKLA at its close today ($2.53 per share).

There are two principal reasons why we would favor this option strategy over buying the stock outright. Although a stock position offers unlimited upside potential, Nikola has literally a wall of resistance above it which means a significant move higher (Barring an aggressive short-squeeze) would be difficult to achieve, to say the least.

Secondly and most importantly is the ability to defend a naked put position. What we mean by this is that if the position were to go against us, a liquid low-value stock such as Nikola should enable us to roll down and out for credit in each cycle if we time our rolling trades correctly. The key here is to roll options well before expiration when options still have plenty of extrinsic value in them. Furthermore, the fact that Nikola is a low-priced stock in dollar terms means rolls will be limited in duration compared to higher-priced stocks.

Conclusion

Therefore, to sum up, recent stability in Nikola's forward-looking earnings estimates has resulted in shares consolidating in recent weeks. Although not overly bullish, we like the risk/reward of put selling (Bullish Play - long Delta) in Nikola at present. Let's see what the next few sessions bring. We look forward to continued coverage.

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