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Nikola (NKLA) call spread - Using Skew to your advantage.
2 min read

Nikola (NKLA) call spread - Using Skew to your advantage.

Nikola (NKLA) call spread - Using Skew to your advantage.

  • NKLA is one of the story stocks in the recent market mania with everyone looking to ride a company with obvious comparisons to Tesla.
  • The stock was down earlier on a regulatory filing (after the the close yesterday) of stock and warrants held by insiders hitting the market.
  • How can one define risk and use the options market's skew to your advantage on a move higher from here?

Overview

Nikola stock is the result of a reverse merger just a few weeks ago and has become a darling of the day trader crowd. As the stock has gone parabolic it has also attracted heavy short interest. The company's announcement of additional shares coming to market has put a slight pause on the stock (a not insignificant dilution of about 6%) and this stock could easily be one of those ones that loses favor and goes back towards $10. But! Those looking for further short squeezes from here are not crazy. What would be crazy is buying stock without defined risk, selling puts naked, or buying out of the money calls. Let's see why:

The Set-Up

Upside skew in calls is outrageous with ATM options in July (65 strike) about 99 vol and the upside calls (like the 100 line) north of 150 vol.

What that means is call spreads, buying the ATM call and then selling really far OTM calls makes for really wide, fairly cheap plays (in comparison). Here's an example, using Options AI technology with a price target near the prior highs in the stock, looking out to July:

Here are the prices on those calls, notice the spread is about the same price as outright buying the 95 call (options are wide obviously)

Now let's compare the two trades. The 65/95 call spread for $4 has a breakeven of $69. The 95 calls for $4 have a breakeven of $99. Which trade would you rather own?

Obviously no one knows where this stock is headed over the next month but for those looking for a squeeze higher from here it'd be insane not to take what the options market is giving and selling a call into that skew.

See a part of OptionsAI technology with your own price target and demo trades in AAPL HERE

Previously:

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