If you like high income, but you are a stickler on entry prices, you may want to consider the options trade described in this report. The trade covers an attractive high-growth stock, trading at a significantly lower price than just 2 months ago due to market noise—as the business remains fundamentally attractive. Rather that purchasing the shares outright, you might instead consider this trade—which generates high upfront income—and gives you a chance to pick up the shares at a significantly lower price. We believe this trade is attractive to place today, and potentially over the next few trading sessions (as long as the underlying share price doesn’t move too dramatically from here).
NIO Inc (NIO)
Share Price (NIO):
NIO is a Chinese automobile company that designs and manufactures electric vehicles primarily targeting premium markets.
We like the business because there is a very large (and growing) total addressable market (TAM) opportunity, and because it has the support of the Chinese government. The share price has recently sold off, thereby making for an attractive entry point (if you want to simply purchase a few shares outright), however the options trade described below generates very high upfront premium income (that you get to put in you pocket and keep no matter what) and it gives you a shot at picking up the shares at an even lower price (if you are a stickler on entry prices for your purchases).
For your reference, you can view our previous full report on NIO here.
The Trade:
Sell Put Options on NIO with a strike price of $33 (~14.2% out of the money, it currently trades at ~$38.48), and an expiration date of May 21, 2021, and for a premium of at least $1.14 (or $114 because options contracts trade in lots of 100). This comes out to approximately 3.45% of extra income in just 37 days—which may not sound like a big return—but it is a lot for such a short time frame (it’s approximately 34.0% of extra income on an annualized basis, calculated as ($1.14/$38.48) x (365/37) days). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive long-term company at a dramatically lower price ($33.00—the strike price) if the market price falls below $33.00 and the shares get put to us before this option contract expires in 37 days. And we get to keep the upfront premium income no matter what.
Also important to note, you can adjust the strike price of this trade (for example to $35) or the expiration date (for example to April 16th) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above).
Your Opportunity:
We believe this is an attractive trade to place today, and potentially over the next few trading days, as long as the price of NIO doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.
Our Thesis:
Our thesis on this trade is simply that NIO is a powerful and attractive long-term growth stock (thanks to its high growth trajectory and large (and growing) market opportunity. Further, current market volatility has driven the upfront premium income available—higher (when volatility is higher, premium income available goes up). This is an attractive trade because it generates high income (that you get to keep no matter what), and it gives you a shot of picking up shares of this attractive business at an even lower price (if they get put to you before the options contract expires in about one month.
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. In NIO’s case, neither is a concern. NIO doesn’t pay a dividend, and it is not expected to announce earnings again until a few days after this contract expires. (earnings announcements add uncertainty, volatility and risk to an options trade because that’s when new information often comes out that can significantly move the share price).
Conclusion:
In a nutshell, NIO is an attractive business trading at an attractive price. In fact, we are not totally opposed to simply buying some shares outright on this recent share price pullback (over the last two months). However, if you are sensitive to price moves, you may instead want to consider this options trade which is particularly compelling based on current market conditions. Not only does it put significant upfront income in your pocket (that you get to keep no matter what), but it also gives you a chance to pick up these attractive shares at an even lower price.