NIO Stock Is Going Nuts. This Is the Best Explanation.

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Shares of electric vehicle maker NIO gained almost 10% Monday. Call options volume rose almost 200% on Monday compared to Friday.


Hector Retamal/AFP via Getty Images

Stock in Chinese electric vehicle maker

NIO

is on fire. While a surge in the volume of options trading isn’t a perfect explanation for the rally, it certainly helped shares soar on Monday.

NIO (ticker: NIO) stock gained almost 10% Monday and shares are up 28% over the past month. The

S&P 500,

for comparison, rose 0.2% Monday and is up 2% over the past month. Call options volume, which rose almost 200% on Monday compared to Friday, is perhaps the biggest reason NIO shares might be more volatile.

Call options give the holder the right to buy a stock at a fixed price. (Buying a call is a bullish take on the underlying stock.) Brokers will sell and trade options contracts because they want to earn a commission on a trade. But brokers don’t want to be short a call option, which means they’ll have to take a loss if the stock rises.

One way brokers can hedge options positions is to buy the underlying stock. If a broker sells a call and buys the stock, they can earn the options commission and, if the stock rises, they can deliver the stock purchased to the call holder. In that scenario, the broker doesn’t have to buy shares at a higher price. That process is one way higher-than-average call buying can drive buying in the underlying stock.

Other factors don’t seem to be at play. Wall Street, for example, can’t be credited with the rally. The average analyst price target for NIO stock is up about 1% over the past month and not much has happened to those targets since the company reported earnings at the end of April. Looking back to that point, the average analyst price target has gone up about $1 to a little more than $59 a share.

News doesn’t seem to be a credible reason for NIO’s rally, either. The last release on NIO’s website is from June 1 when the company reported May deliveries. Those numbers relieved investors because the electric vehicle company maintained second-quarter delivery guidance despite a global automotive semiconductor shortage that has roiled the entire industry.

NIO shares are now up 1% year to date. It’s been a wild ride so far in 2021. Based on recent trading, the ride will continue.

Write to Al Root at allen.root@dowjones.com