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It’s fundamentally problematic so why is electric vehicle upstart Canoo (GOEV) skyrocketing? As Barchart content partner The Motley Fool recently stated, Canoo used to be a Wall Street darling during the early part of the COVID-19 pandemic. However, with GOEV stock hemorrhaging equity value, investors have largely abandoned ship for their own good.
As the article goes on to state, the company doesn’t generate any sales. “Canoo reported zero revenue in the first half of 2023. It reported no revenue for the full 2022 year and the same top-line result for 2021 as well. Basically, it isn't selling anything at this point,” wrote TMF contributor Reuben Gregg Brewer. Naturally, questions about a viable pathway to profitability hang over the enterprise.
Adding to the woes for GOEV stock, Canoo is diluting its current shareholders. “Since Canoo isn't bringing in any cash by selling products, that means it has to find a way to fund its development in some other fashion. That generally means issuing debt and/or selling stock,” Brewer wrote.
So, how is it possible that GOEV stock gained nearly 40% in the trailing five sessions? If you guessed short-covering speculation, you’re likely onto the correct answer.
Deciphering the Vagaries of Call Options
Following the close of Monday’s session, GOEV stock options represented one of the most aberrant trades according to Barchart’s unusual stock options volume screener. Total volume clocked in at 36,625 contracts against an open interest reading of 396,221 contracts. The delta between the Monday session volume and the trailing one-month average metric came out to 636.48%.
However, the transactional breakdown caught investors’ attention. Out of the 36,625 total contracts on Nov. 20, only 280 represented put options. That left 36,345 contracts on the call volume ledger. On paper, that sounds incredibly bullish. After all, call option holders enjoy the right (but not the obligation) to acquire the underlying security at the listed strike price.
It’s important to point out that option holders also represent shot callers. Like a quarterback, the option holder – not the option writer (or seller) – determines if the contract is going to be exercised or not. That leaves sellers potentially on the hook until the option expires. Stated differently, the open interest is key to understanding short-covering speculation tactics.
In many ways, open interest is similar to having runners on base in the sport of baseball. As a pitcher, the worst situation you can face is a bases loaded situation with zero outs in the inning in a tight (and meaningful) contest. Your aim is to survive the inning, at which point the runners are left on base and no damage is done.
However, on the other side of the dugout, your opponents smell blood in the water. While baserunners don’t automatically translate to runs, the team on offense knows that a well-placed hit could yield a run or even several runs.
In other words, the odds shift in the favor of the team swinging the bat – or in options lexicon, a shift in implied volatility (IV) materializes, leading to a change in momentum. That’s called a Vega squeeze.
Vega Squeeze Lifting GOEV Stock
Also known as a volatility squeeze, a Vega squeeze involves changes in IV, which is measured by Vega. You can see the sentiment shift in Barchart’s historical view of IV rank. On Oct. 30, GOEV stock options’ IV rank sat at 30.68%. Over the next several days, this metric peaked at 100% on Nov. 9. Suddenly, the pendulum swung in favor of the bulls.
To use another baseball analogy, imagine if a team is down by several runs. Suddenly, they start batting in some runs and at the moment, they worked their way into a bases loaded situation. Now, with a few more runs, the previously embattled team can even the score. Of course, that puts tremendous pressure on the opposing team, who’s now fretting about which reliever to bring up from the bullpen.
Going back to the unusual options volume, most of the trades engaged on Monday were for call options. However, Fintel’s screener for options flow – which exclusively targets big block transactions likely made by institutions – shows heavy volume of sold calls by large entities; specifically, 25,802 contracts of the Jan 17 ’25 1.00 Call.
Essentially, the big dogs are betting that even by January of 2025, GOEV stock won’t hit $1 (it’s trading at 36 cents now). Arguably, that’s an unusually risky bet and the contrarian bulls are calling (no pun intended) the bears out on the risk.
Now, how long this standoff can last is anyone’s guess. As a short-term trade, going long GOEV stock might be enticing. However, the underlying company hasn’t done enough to justify a long-term commitment.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
