Nikola Stock Attracts Large Numbers of Put Buyers

Barchart reported on Friday, Oct. 14, shows investors bought large numbers of put options on Nikola Corp (NKLA) stock at the $3.00 strike price. They clearly expect NKLA to fall well below $3.00.

The put buyers were reacting to the news on Friday that the former CEO of Phoenix-based Nikola Corp, Trevor Milton, was found guilty of securities and wire fraud charges in a federal court. In effect, the bad news for Milton spilled over onto NKLA stock.

NKLA stock has dropped from a peak of $8.05 on Aug. 5 to $3.06 on Aug. 16, seen in the chart below. That is a drop of 62% in less than two weeks.

This massive number of put contracts purchased at the $3.00 strike price was reported in the Barchart Unusual Stock Options Report on Aug. 14 at the close of business.

This shows that the investors paid 25 cents for over 50,000 put contracts at the $3.00 strike price for puts that will expire at the end of the month (less than 2 weeks). That cost the investors $1.2639 million (i.e., $0.25 x 100 x 50,557). This means that the stock has to fall below $2.75 per share just to become profitable.

The other set of options expires on April 21 (over half a year away) and they paid 91 cents for 100,880 contracts, or $9.18 million (i.e., $0.91 x 100 x 100,880). That means NKLA stock will have to fall below $2.08 by the end of April 21 before the investors in the puts can make money. That is a highly confident bet.

This paints a very clear picture that the put buyers feel very strongly that NKLA stock is going to crater. To go from $3.06 to $2.75 in two weeks is a 10% drop from a $1.34 billion market cap to $1.20 billion. The six-month put contracts suggest the investors expect to drop over 31.7% from $1.34 billion to below $1 billion (i.e., $915 million).

What is Going On With Nikola Corp?

Nikola Corp, the Phoenix-based green tech semi truck maker made just $18.13 million in revenue last quarter (Q2) but lost over $172 million or 45 cents per share. It was able to make 50 battery electric vehicle (BEV) semi trucks and delivered 48 of them from its new plant just south of Phoenix in Coolidge, AZ.

However, it could run out of cash at this rate. The company has burnt through $273.8 in operating cash in the last six months, plus an additional $90.3 million in financing costs, or over $364 million. This can be seen in the Cash Flow statement as of June 30 (below).

The problem is it has just $441 million in cash in the bank and almost $283 million in interest-bearing debt.

This implies the company is either going to have to do another equity capital raise that could be very dilutive or else borrow a large amount of money. The latter will have the same effect on the stock price.

Moreover, Nikola is now going to face severe competition from Tesla Inc (TSLA), now that they are expecting to deliver their first BEV semi trucks as well in December. Tesla has a $695 billion market cap is and profitable and produces large amounts of free cash flow (FCF).

Where This Leaves Investors in NKLA Stock

Investors in NKLA should probably be very careful here. The presence of such a huge amount of put contracts could weigh heavily on the sentiment for the stock. 

For example, Nikola Corp could be forced to get ahead of this quickly and announce a large share offering or even a rights offering at a discount to today's stock price.

The company will announce its Q3 results, including production and delivery activity on Nov. 3. Investors may want to wait until then before taking a long position. The put buyers' smaller tranche of puts will expire before then, suggesting they believe there will be a heavy downdraft in the stock prior to the release of results.