Why Rivian’s Downhill Drive Is Tempting Speculators - Rivian Automotive (NASDAQ:RIVN)

On the surface, electric-vehicle manufacturer Rivian Automotive Inc RIVN may seem like a shoo-in for long-term upside. As research firm S&P Global Mobility pointed out recently, analysts there anticipate that automotive companies will sell 15.1 million units of battery EVs this year. If so, that would represent a 30% lift from the prior year. Nevertheless, questions cloud RIVN stock to the point where the bears might win out for now.

First, investors must be cognizant of the political risks impacting Rivian and the broader EV industry. During Tuesday’s premarket session, jubilance reigned as the dominant emotion as Donald Trump became the 47th President of the U.S. However, this optimism failed to carry RIVN stock, which slipped conspicuously throughout the session. With Trump openly supporting an energy policy of "drill, baby, drill," the skepticism over Rivian's business prospects wasn't surprising.

Second, the competition in the space is fierce. It's not just that Rivian is competing against sector juggernaut Tesla Inc. TSLA, which would be a handful in and of itself. Rather, Tesla too is struggling on certain levels, even with company CEO Elon Musk's relationship with Trump. In particular, Tesla's aggressive price cuts have challenged the entire ecosystem.

Eventually, Rivian may piece together the elements to sustainably move higher. However, for now, positive news items — such as Rivian's recent loan agreement — have only led to sporadic upside.

The Statistical and Technical Case Pressuring RIVN Stock

With Rivian's equity entering the public arena in November 2021, it doesn't offer as much trading data as Tesla. Nevertheless, with hundreds of weekly sessions in the books, behavioral tendencies can be observed. When RIVN's trading data is viewed strictly from a stochastic or temporal basis, it demonstrates a negative bias.

For example, on a week-to-week basis, bulls have a 45.18% chance of seeing a positive return. On a four-week basis, there's only a 42.33% chance that a position held at the beginning of the period will be in the black by the end of it. Thus, the tendency is that additional time leads to a greater likelihood of negative outcomes.

Of course, human emotions ultimately dictate the market and RIVN stock is no different. Last week, RIVN posted a return of 4.95%. However, of the times when it posted a weekly return of up to 5%, the response by the end of the fourth subsequent week was positive only 35.71% of the time.

Granted, when statistics are viewed dynamically as in the above case, the dataset shrinks considerably. However, the central problem is that temporally, RIVN stock already carries a negative bias. Adding additional context — in this case, a weekly return of up to 5% — does nothing to change the behavioral tendency. Indeed, the odds appear to worsen.

Lastly, the technical profile of RIVN stock doesn't offer much confidence for the near term. From the middle of December, it appears that RIVN has charted a pattern reminiscent of a bearish head and shoulders. During the summer season last year, a similar formation materialized, warranting skepticism.

Bearish Options Strategy Tempts Aggressive Traders

Another element that tempts speculators is that when RIVN stock encounters negative statistical outcomes, the magnitude of downside is quite robust. For example, four weeks following a weekly return of up to 5%, the median loss under negative outcomes is 19.04%. Based on last Friday's close of $14.21, there's a strong possibility that RIVN could fall to $11.50 by the options chain expiring Feb. 14.

With this intelligence, aggressive traders may consider a bear put spread. This multi-leg options strategy involves buying a put option and simultaneously selling a put at a lower strike price for the same expiration date. The idea is for the underlying security to drop to or below the short strike, triggering the maximum payout.

To be clear, the reward is capped at the short strike price. However, the benefit of the bear put spread is that the credit received from the short put helps partially offset the debit paid for the long put. Effectively, the net bearish position is discounted.

Putting it all together, adventurous traders may consider the 13.00/11.50 bear put spread (buy the $13 put, sell the $11.50 put) for the Feb. 14 expiration date. At time of writing, the breakeven price for this trade is $12.48. Should RIVN stock fall to the short strike target, the max payout stands at over 188%.

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