Cooking Without Gas

August 15, 2022

Cooking Without Gas

Electric-vehicle maker Rivian Automotive (RIVN) reported earnings on Thursday afternoon that met on earnings but easily beat on revenue. In fact, revenue was up 283% from the previous quarter. But the company also warned that 2022 losses would be wider than expected. However, preorder growth is strong, and the company reiterated its projection of producing 25,000 vehicles this year.

The market didn’t seem to know how to take to the news. Analysts reacted with target price increases and decreases, though there were no ratings changes. The target price spread is ridiculously wide, ranging from $24 to $147. The average is $60.31, which is 55% higher than Friday’s close. The stock closed flat on Friday.

What is much clearer, however, is that the stock is in a substantial uptrend, gaining nearly 60% in the past six weeks. This rally has been guided by the 20-day moving average, which currently sits at $34.76. Note that the short put strike of our credit spread (34) is below the 20-day, so continued trendline support should keep our spread out of the money.

This trade is a bet that RIVN’s revenue growth will outweigh its bottom line losses, much like Amazon in its early days. If you agree that RIVN will continue to rally above its 20-day moving average (blue line), consider the following trade that relies on the stock staying above $34 (red line) through expiration in seven weeks:

Buy to Open the RIVN 30Sep 32 put (RIVN220930P32)
Sell to Open the RIVN 30Sep 34 put (RIVN220930P34) for a credit of $0.50 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $38.90 close. Unless RIVN surges quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 – $48.70). If RIVN closes above $34 on September 30, both options will expire worthless and your return on the spread would be 32% ($48.70/$151.30).