MULN Stock: How to make money as Mullen Automotive stalls
- Mullen (MULN) the security is trapped in a trading range
- Options prices have exploded higher
- Both Traders and Investors Should Consider Reaping Rich Options Premiums in a Covered Way
Part of the attractiveness has been from the Mullen Automotive (NASDAQ:MULN) cast manic memes. Stocks appeared to have found some semblance of sanity as they consolidated around the 20-day moving average. Options, however, are still priced at historically rich extremes. It’s time to take advantage of continued consolidation with a covered call strategy.
Opinions on MULN stocks run the gamut. Bulls and bears abound.
Believers versus Skeptics
GS Early wrote an insightful article on InvestorPlace last week on MULN stock. The article highlighted several reasons to be optimistic about the future of Mullen Automotive.
A few days later, InvestorPlace contributor Will Ashworth wrote an analysis with an opposing view. This has raised cash flow and dilution issues that question the validity of MULN shares as an ongoing concern.
The company has attempted to assuage some of the cash burn issues with a Tweeter from March 28. Mullen said he expects to have more than $65 million in cash and near cash by the end of the month. They also appear to be in good shape for the rest of 2022. This is crucial given the rise of the Mullen Five Crossover.
Without a doubt, Mullen Automotive is polarizing action. True believers will always point to a bright future. Opponents will inevitably say the money will run out before the product materializes.
This is similar to how one can look at recent price action. The bulls will say that the selling has become too extreme. MULN stock has fallen more than 80% from recent all-time highs at $13 last November.
The bears will try to argue that the recent scorching rally is now ridiculous. Shares have soared nearly 300% from lows of nearly 60 cents just over a month ago.
Both bulls and bears would be right. Everything depends on the perspective. This standoff between believers and skeptics will likely continue for the foreseeable future.
My view, however, is from an options perspective. I have no idea if MULN stock is a buy or sell at current levels. I know, however, that MULN options are a definite sell given the extraordinarily expensive option premiums.
The recent return of Meme Mania has been more than evident in MULN stock options. Yesterday, over 55,000 options contracts were traded. Implied volatility (IV) is still in the stratosphere at just under 200%. Just recently, IV was almost half of current levels, just above 100%.
The two option setups below show how much implied volatility has increased. It is important to remember that IV is just a fancy way of saying the option price.
On January 27, MULN stock closed at $2.91. Calls on March 2.5 were priced at 65 cents (120.55 IV). These options expired in 50 days.
Fast forward to yesterday and you can see how things got more expensive at Optionland. MULN stock closed at $2.35. Calls on May 2.5 closed at 65 cents (199.21 IV). These options expire in 52 days.
So the options were priced at the same price even though MULN stock was 56 cents lower and the options were two days longer to expiration. 56 cents may not seem like a lot, unless it’s a cheap stock like MULN. The 56 cents equates to a stock price about 20% lower.
Buying a much cheaper stock and selling a call option at the same price to hedge seems like a good idea to me. The recent IV’s huge spike ideally sets up for a covered call trade on MULN stock.
How to Trade MULN Stock Now
Buy MULN shares and sell the May 2.5 calls
The trade is expected to cost around $1.70 based on the most recent closing prices ($2.35 for the stock price minus $0.65 for the option price). Ideally, MULN stock closes above $2.50 at the May 20 expiration and the shares are redeemed at the strike price of $2.50 for a net gain of 80 cents. This equates to a 47% return on the original cost of $1.70.
If MULN stock is below $2.50 at the May expiration, additional longer term calls could be sold against the stock to further harvest the option premium and reduce the initial net cost.
As of the date of publication, Tim Biggam had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.