Heavy Selling In Nio Call Options Is Bearish Signal

Shares of Chinese electric vehicle maker Nio Inc - ADR NIO are down more than 19 percent since Benzinga reported some large bullish Nio options trades back on May 8. The stock came under selling pressure on Wednesday following its first-quarter earnings release Tuesday and a subsequent downgrade from Bank of America.

On Wednesday morning, a series of large Nio option trades suggests the company once again has option traders’ attention.

The Trades

Throughout the morning, Benzinga Pro subscribers received a number of options alerts related to Nio.

At 9:37 a.m. a trader sold 1,200 Nio call options at a $3 strike price that expire on June 21. The calls were sold at the bid price of 69.4 cents and represent an $83,280 bearish on Nio shares.

The next several large trade came within five minutes of the first. Potentially the same trader first sold another 500 Nio call options at a $4 strike price that expire on Jan. 17, 2020 at the bid price of 65.1 cents. A few minutes later, a trader sold another 505 Nio put options at a $3 strike price that expire on Aug 16 at the bid price of 84 cents. The two sales represented a $74,970 bearish bet on Nio.

Shortly thereafter, a trader sold another 500 Nio Jan. 17, 2020 call options at a $4 strike price at the bid price of 68 cents only to almost immediately buy them back at the ask price of 70 cents.

Later in the morning two more Nio option trades were processed. The trader first sold 500 Nio call options at a $4 strike price that expire on Nov. 15. The calls were sold at the bid price of 61.1 cents. Then, the trader came back and bought 500 Nio put options at a $5 strike price that expire on January 17, 2020. The puts were bought at the ask price of $1.921. Together, the two trades represented a $126,600 bearish bet against Nio.

Why It’s Important

Due to the relatively complex nature of the options market, options traders are generally considered to be more sophisticated than the average stock trader. In addition, large options traders are often professional, wealthy individuals or institutions, either of which could have unique insight or information about a company. Even traders that stick exclusively to stocks watch the option market closely for unusual trading activity as an indicator of where the “smart money” is focusing.

Given the deterioration in U.S. trade relations with China in recent weeks, the large bearish bets against Nio could be a sign options traders believe the trade war will continue to weigh on China’s economy for the foreseeable future.

The People’s Daily, the official newspaper of the Communist Party of China, said Wednesday that it advises the U.S. “not to underestimate the Chinese side’s ability to safeguard its development rights and interests,” suggesting another round of retaliation is coming soon.

Unfortunately, because stock investors often use put options to hedge larger bullish stock positions, there’s no way to be 100 percent certain whether an option trade is a standalone purchase or a hedge against a stock position. Given the Nio trades this morning individually represented less than $200,000 bets, they are unlikely to be hedges in this case.

Nio's stock traded around $3.72 per share at time of publication.

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