Mullen Automotive (MULN) Becomes the Target of Unusual Options Activity

On surface level, electric vehicle manufacturing upstart Mullen Automotive (MULN) makes for an intriguing bullish case. With the broader political and ideological spectrums bolstering the concept of EV integration, MULN stock attracted speculative interest throughout the post-pandemic new normal. However, since late 2021, the company has tested investors’ patience and it may have finally reached a breaking point.

Over the years, both EV makers and infrastructure providers garnered significant interest among investors. In particular, sector leader Tesla (TSLA) confirmed that the EV market is both fashionable and economically viable. The proof is in the numbers.

Up until the end of 2020, Tesla featured a retained earnings loss of nearly $5.4 billion. But exactly one year later, retained earnings featured a positive tally of $331 million as consumers rapidly transitioned to EV ownership. Moreover, on a trailing-12-month basis, Tesla’s retained earnings stands at $5.9 billion, helped at least in part by soaring hydrocarbon (gasoline) prices.

Naturally, legacy automakers like Volkswagen (VWAGY) and Toyota (TM) have jealously eyeballed Tesla’s runaway success and have implemented their own respective EV initiatives. But the boost in interest toward electrification inspired legions of upstarts including Mullen Automotive. Further, speculation within social media circles loosely sparked the idea that MULN stock could be the next Tesla.

While such a notion may have sparked dramatic swings in MULN stock earlier, this year, the underlying company has suffered significantly, hemorrhaging more than 88% of market value. Perhaps more ominously, Mullen became the subject of unusual options activity with downside implications.

Traders Getting Tired of MULN Stock

When the dust settled on the Wednesday, Sept. 7 session, MULN stock found itself up 1.2% in the open market. Tesla received a glowing review from Goldman Sachs, with the financial giant’s research arm reiterating its bullish thesis on TSLA. Since Tesla tends to act as the proverbial rising tide, the news helped lift the broader EV sector.

Nevertheless, such actions in sympathy failed to change bearish traders’ minds. Instead, many piled into put options for MULN stock, specifically the derivatives with a $5 strike price and an expiration date of Oct. 21, 2022. Volume for this transaction hit 7,260 contracts against an open interest reading of 132.

The bid-ask spread as represented by the midpoint price ($4.35) was 2.3%. Primarily, this indicates ample liquidity for the trade. As well, the underlying market maker has confidence in properly placing this transaction, thus the narrow margin of safety. The delta stood at -0.857.

In the open market on Wednesday, MULN stock closed at 67 cents. Therefore, this put option is deep in the money, implying that traders are looking for significantly more downside pressure to affect the EV maker.

Interestingly, though, for the time being, the bearishness in MULN stock in the options market goes against the prevailing trend. Per data from Barchart.com, the put/call open interest ratio sits at 0.28. Typically, the delineation point between bullish and bearish sentiment is 0.70, with figures higher than this indicating that more traders are buying puts relative to calls.

The perhaps unintuitive profile possibly reflects the intense grassroots support that Mullen enjoys. Nevertheless, even longtime investors may be losing patience with the company.

A Notable Broken Promise

On June 3, Mullen CEO David Michery went on a live streamed interview with Benzinga. During the discussion, Michery promised to reveal core details regarding the company’s delivery of an electric van to a mystery Fortune 500 company. Specifically, the chief executive stated that Mullen will release a press report, emphasizing that “everything” would be included in the document, including questions about order size and delivery timelines.

When June 30 finally arrived, Mullen provided information about its balance sheet but nothing about EV deliveries. MULN stock dipped down on the news, though traders quickly worked to stabilize its market valuation. Social media posts indicated that Mullen fans were not perturbed by the smoke-and-mirrors act.

Later, on July 11, Mullen revealed that it signed a binding agreement with DelPack Logistics (DPL), which is an Amazon (AMZN) Delivery Service Partner. Per the press release, “DPL will place a purchase order for up to 600 Mullen Class 2 Electric Cargo Vans over the next 18 months.”

Unsurprisingly, MULN stock jumped on the disclosure. However, since the announcement, shares have gradually faded. On July 11, MULN closed at $1.22. Again, following the Sept. 7 close, the stock sits at 67 cents. That’s a 45% loss despite management coming through with the details (albeit in a delayed manner).

What’s going on here? Under a tough economic environment, trust becomes paramount. If investors can’t trust Mullen in the simple details (like releasing PR on time as promised), they will likely have greater difficulties trusting much more ambitious targets, such as production goals.

Memes Couldn’t Save Mullen

To be fair, speculators still have an opportunity to profit on the long side of MULN stock. Simply, the underlying firm features intense bullish interest from meme-stock traders. It would be foolish to not recognize the potential risk in shorting a heavily promoted name.

At the same time, it’s interesting that even with the good news finally delivered, it didn’t change the outcome for MULN – at least not in a positive way. Therefore, even battle-hardened speculators should be careful about engaging Mullen Automotive.

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