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NIO, an electric vehicle manufacturer, had its stock rise nearly 10% on Monday. On Monday, the volume of call options increased by over 200 percent compared to Friday.

Getty Images/AFP/Hector Retamal

The stock of a Chinese electric vehicle manufacturer

NIO

is ablaze. While an increase in option trading volume isn’t a perfect explanation for the rise, it did help stocks rocket on Monday. The stock of NIO (ticker: NIO) rose about 10% on Monday, putting it at a 28 percent gain in the last month. The

S&P 500,

, on the other hand, increased 0.2 percent on Monday and is up 2% in the last month. The fact that call options volume increased around 200 percent on Monday compared to Friday could be the greatest reason why NIO shares are more volatile.

The holder of a call option has the right to purchase a stock at a predetermined price. (Buying a call means you’re betting on the underlying stock going up.) Brokers will sell and trade options contracts in order to profit from the transaction. Brokers, on the other hand, don’t want to go short a call option because it implies they’ll have to lose money if the stock increases. Buying the underlying stock is one technique for brokers to hedge their options bets. If a broker sells a call and buys the stock, they can earn the options commission and deliver the stock purchased to the call holder if the stock increases. In this case, the broker is not required to purchase shares at a higher price. One way that higher-than-average call purchasing can promote buying in the underlying stock is through this mechanism. Other elements don’t appear to be involved. The rally, for example, cannot be attributed to Wall Street. The average analyst price target for NIO stock has increased by around 1% in the last month, with little movement since the business published profits at the end of April. Looking back to that time, the average analyst price objective has increased by nearly $1 to little over $59 per share. News does not appear to be a valid explanation for NIO’s rally. NIO’s most recent press release was on June 1st, when the business reported May deliveries. Despite a global automotive semiconductor shortage that has roiled the whole industry, the electric car manufacturer maintained second-quarter delivery guidance, which relieved investors. NIO’s stock has gained 1% so far this year. So far in 2021, it’s been a crazy trip. The ride is expected to continue, based on recent activity. Al Root can be reached at allen.root@dowjones.com.
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