At some point, investors will pay attention to yellow flags. Somebody better tell Cowen. The firm is out reiterating an "opportunity" in Nikola (NKLA) with a price target of $79. On the flip side you have RBC Capital lowering their price target from $49 to $21. Guess who advised on the VectoIQ purchase of Nikola?
Cowen is ignoring the red flag around Nikola because they are pot committed on the company. They will ride this to zero if they have to in order to obtain future deals. An investment bank can't be seen turning their back on one of their kids. Fortunately, traders and investors have the choice to walk away. I've spoken about my concerns regarding Nikola's Milton in the past. I almost doubled-back when the deal with General Motors (GM) came about, but after reviewing the deal and discovering GM only risks a bit of reputation and no money on the deal, I opted to focus on that instead. The idea of short NKLA/Long GM has worked out well for those who rolled the dice.
In the end, we're likely to see short-term reiterations and price changes that align with banking relationships rather than factual based research and targets. Sure, there will be "facts" based on the projections, but Nikola appears to be nothing more than a concept contingent on the cobbling together of other company technologies. It means either other EV companies are still highly undervalued or Nikola remains wildly overvalued. It's probably a - "they will meet in the middle" scenario. That means watching for opportunity if we see a broad selloff in the group.
On another note, there was an interesting question posed in the comments section of Doug's Diary this morning. The question pertained to closing long puts in the pre-market. This could apply to calls as well, but if the blunt answer is no. No, you can't.
That being said, it doesn't mean you can't do anything. A long, uncovered option, or even a short uncovered option can be hedged. That is where delta comes into play on an option. For example, if you were long an S&P 500 ETF (SPY) put coming into the morning that carried a delta of .50, then a trader could go long 50 shares of SPY in the pre-market to roughly offset their put position. This essentially locks in your position.
It's important to note that if you do employ this type of technique, there are nuances to consider. If I'm short the option (call or put), then I will generally close the position immediately after the market opens. A short option position means my upside is limited to the premium of the option I sold. When I'm hedging that position with an offsetting stock position, my risk can dramatically increase. Therefore, I would focus on closing these hedging plays as quickly as possible.
On the flip side, if I'm offsetting a long option with a stock position (if I'm long a put, then I'm buying stock and if I'm a long a call, I'm shorting stock), then I might consider holding for a bit, especially if my option position has become predominantly intrinsic value. By doing so, I create an unlimited gain potential in the case of buying stock to hedge a long put or more upside potential doing the opposite (short stock against a long call). I do have to consider the borrow cost if I'm shorting a stock against a long call.
My absolute favorite though is when I'm long a put, the stock falls into-the-money, and I can buy the stock as the hedge/offset. If I continue to hold, then I potentially benefit if the stock rallies. If the stock falls, my delta will increase on the put (assuming it was below 1.0 when I hedged) and I can actually make a little more on my position even with the hedged stock. The only lose potential in that scenario is if the put had a lot of time value in it and I sit through the decay. Admittedly, this doesn't happen often, but over the past two decades, it has produced my absolute largest winning trades. If you are a put buyer, learn this hedging approach like it's your job. That's the biggest takeaway I have for you in 2020.