Shares of Vietnam-based electric vehicle (EV) maker VinFast (NASDAQ:VFS) are falling sharply on Friday. VFS stock is now down more than 45% for the past five sessions. Unsurprisingly, business media personalities have been sounding the alarm about the speculative venture. Meanwhile, options traders appear to be taking advantage, making VFS risky for even the most sophisticated investor.
The main contention right now centers on VinFast’s valuation. At its peak, VFS rose more than 300% from its debut price of $22, pushing its market capitalization beyond $200 billion in the process. According to Seeking Alpha, that briefly made it the third-largest car company trading in the U.S., behind just Tesla (NASDAQ:TSLA) and Toyota (NYSE:TM).
Indeed, at one point, VinFast was worth more than General Motors (NYSE:GM), which currently has a market cap of around $45 billion. With its recent losses, however, VinFast carries a roughly $39 billion market cap.
Yesterday on CNBC’s “Mad Money” program, host Jim Cramer warned viewers not to get involved with VFS stock. With VinFast only managing to sell 7,400 vehicles last year, questions have also sparked around the company’s viability.
VFS Stock Causes Options Traders to Salivate
Given that VFS stock made its Nasdaq debut in mid-August, technical analysts have noted that the charts don’t provide much help in deciphering a narrative for the EV startup. However, the options market provides plenty of material, serving as a warning to even astute market participants.
According to Fintel, VinFast’s volatility smile — a chart that plots implied volatility (IV) at various strike prices — reflects an unusual dynamic. Essentially, IV sits at a low point of 1.66 at the $16 strike price, not far from VFS stock’s time-of-writing price.
Moving in the far out the money (OTM) direction (i.e. to the right), however, IV peaks at 3.11 at the $85 strike price. In contrast, moving in the deep in the money (ITM) direction (left), IV skyrockets to a peak of 5.72 at the $5 strike.
Fintel’s options flow screener — which filters for big block trades likely made by institutions — shows a mixture of various tactics as well. However, the overwhelming posture is bearish. Interestingly (and this is a key point), traders are selling (or writing) options, both puts and calls. Generally, selling puts and calls carries the opposite implication of buying said derivative contracts.
Traders have an incentive to sell options when IV spikes higher. Basically, high IV equates to high demand for the underlying derivatives, enabling selling traders to accrue richer premiums.
Tellingly, one of the largest big block transactions tracked by Fintel involves the sale of $2.50 calls with an expiration date of Sept. 15, 2023.
Why It Matters
Besides the wild trading in the options market, investors should note that VFS stock entered the public market via a merger with a special purpose acquisition company (SPAC). Typically, SPACs have not performed well post-merger. This in part due to the dilution of share value via warrants.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
