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Electric vehicle charging station manufacturer Chargepoint Holdings (NYSE:CHPT) has certainly come down sharply from the euphoric highs of last December. CHPT stock is now nearly 66% below those highs. The company continues to bleed cash. The last four quarters have shown losses, with more likely on the horizon.
Mark Hake recently took a deep dive on the future and the financials for Chargepoint. He recommended patience before pulling the trigger, but did feel the current cash burn rate will continue to temper.
Chargepoint is one of those stocks that is more about the idea than the earnings. Certainly EV charging stations will continue to show exponential growth over the coming years as electric vehicles become more and more prevalent. The real question is how much of this burgeoning market Chargepoint will ultimately capture.
CHPT stock has been a a well-defined downtrend since making all-time highs near $50 to at the end of 2021. Shares continue to make a series of lower highs.
This was clearly evident yet again last week. CHPT traded up to just past $15 before it reached overbought levels on a technical basis. The trend line held once again as the stock was once again rebuked and returned back to the 20-day moving average.
This marks the fourth time this scenario has played out in a similar fashion over the past six months. Look for this downtrend line to continue to be significant overhead resistance over the coming weeks.
Unusual Option Activity
CHPT stock saw enormous option volume on June 3. Over 100,000 of the July $15 calls traded versus just 818 open interest-meaning this was fresh aggressive buying. The 100,000 contracts equates to a potential commitment for 10 million shares of stock. Since that time an additional 20,000 contracts have traded. Open interest now stands at over 120,000. Big-time buying to say the least.
While big time call buying doesn’t always mean someone knows something, it sometimes coincides with subsequent large underlying moves in the stock.
The continued call buying has driven up the implied volatility (IV) on the options sharply from under 80 before the buying to over 97 now. Higher IV means option prices are comparatively more expensive. This favors option selling strategies when constructing trades.
So to position to follow the flow and lean bullishly with the big call buyer, a covered call strategy makes probabilistic sense. Plus you are selling expensive calls to hedge a stock trading at a cheaper level.
How to Trade CHPT Stock Now
Buy CHPT stock and sell the July $15 calls for $11.70 net debit or better.
Each call controls 100 shares of stock, so sell one call for every 100 shares bought.
Selling the calls reduces the downside exposure by the premium you received for the sale. Since there is no free lunch, it also caps off the gains above the $15 strike price. The $15 strike price is also right at the downtrend line that has been a ceiling on the stock.
The trade is 72 deltas net long at inception, or the equivalent to 72 shares of stock for each 100 shares bought and call sold.
In essence, you give up some of the upside to protect some of the downside when doing a covered call trade. In the case of this trade, the upside would still be a healthy 28% overall return on CHPT stock if it is above $15 at July expiration.
If CHPT stock is below $15 at July expiration, additional calls could be then sold to further reduce the downside risk.
Traders and investors looking for a lower-risk way to take a bullish stance in CHPT stock would do well to consider a covered call strategy.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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