Strong support at the bottom, but short-term upward momentum is lacking. How should NIO be handled?

Hello, everyone.

In this episode of yield hunting, I'd like to share a strategy for a popular Chinese stock: NIO (NIO Inc.).

Those familiar with this stock know that NIO’s price has been in a downtrend from early August last year until September this year.

Since September, a technical bottom has appeared, followed by a recent surge in Chinese stocks, forming a golden cross, and the M60 moving average has also started to trend upward.

However, as the recent surge in Chinese stocks pulls back, NIO has also begun to retrace. Currently, the price is around the M60 moving average, where support is expected to form.

In summary, NIO has established a strong support level around the $3.6 price point from a technical perspective, but upward momentum is lacking, and the likelihood of a pullback is high.

So, what is the most cost-effective strategy at this point?

The answer is FCN! Before explaining why, let’s first look at the cost-effectiveness of buying the stock or options.

If you directly go long on the stock, we cannot yet say that NIO is beginning an uptrend, as it’s currently in a pullback phase. Whether it will reverse or just rebound remains uncertain. Additionally, repeated consolidation and pullbacks could test the patience of many investors, eventually leading them to sell out of frustration.

Since there is strong support at $3.6, would selling a put be a more cost-effective way to go long? Tiger academy believes that for a stock with strong support, while selling a put might not have significant delta risk, there is considerable risk of an implied volatility (IV) spike.

For example, looking at a put option with a $4 strike price expiring on January 17, 2025 (the same expiration date as FCN for comparison), IV is currently at a historical low. If the stock price continues to drop toward the $3.6 support level, the Vega and IV could spike, meaning selling a put now might not be the best strategy.

If you use an FCN (Fixed Coupon Note) strategy, it would be more cost-effective than the two methods mentioned above. Let’s first take a look at the FCN pricing parameters for NIO.

Strike price ratio is 80%, meaning the exercise price is approximately $4.

The annualized coupon rate is 37%.

Maturity date is 3 months.

In the best-case scenario, if there's no conversion or knock-out event, the coupon yield after 3 months would be 9.25% (37% * 3/12).

If the stock price rises during the period and enters an upward channel, triggering a knock-out, the FCN (Fixed Coupon Note) terminates. In this case, in addition to receiving the principal and interest for the holding period, it also frees up liquidity for investors to purchase stocks or other equity products to seek higher returns.

If the stock price falls below the support level and triggers a conversion, although there will be losses, compared to the high leverage of a sell put strategy, the number of shares received through FCN under the same capital investment is much smaller, and the losses will also be significantly lower than with the sell put strategy.

In conclusion, using FCN to operate on NIO offers a higher cost-performance ratio.