Overview
On May 15, 2024, I initiated a vertical put option strategy on Li Auto (LI) by selling a put option at a strike price of USD 23 and simultaneously buying a put option at a strike price of USD 22. This strategy, which is set to mature on June 14, 2024, allowed me to collect an option premium of USD 25.
Market Context
Li Auto's stock has experienced significant volatility recently. After reaching a 52-week high on February 26, 2024, the stock plummeted by 42% due to the company’s reduced March delivery estimates. The primary catalyst for this decline was the negative reception of Li Auto's new electric vehicle model, Mega, by Chinese consumers. This was compounded by broader concerns about the slowdown in China's new energy vehicle market, which led to a widespread selloff in the industry.
Strategy Reflection
Reasons for the Vertical Put Option
1. Income Generation:
The vertical put option strategy allowed me to collect an immediate premium of USD 25. This upfront income provides a buffer against potential losses and enhances overall return.
2. Limited Risk Exposure:
By setting a narrow range between the strike prices (USD 23 and USD 22), the potential loss is capped. The maximum loss is limited to the difference between the strike prices minus the premium received, ensuring a controlled risk environment.
3. Bullish Outlook:
Despite the recent selloff, I believe Li Auto retains a competitive edge in the market. The company’s strategic position and growth potential in China’s expanding EV market support a bullish long-term outlook. This strategy aligns with my belief that the stock price will stabilize or rise slightly by the maturity date, avoiding a significant drop below USD 22.
Market Insights
1. Competitive Advantage: Li Auto's strong market presence and innovative product lineup provide a moat that can shield it from temporary setbacks. The recent misstep with the Mega model, while impactful, does not diminish the company's overall market potential.
2. Growth Potential:
The EV market in China is still in its early stages of expansion, and Li Auto is well-positioned to capitalize on this growth. The company's ability to innovate and adapt will likely drive future success.
3. Investor Sentiment:
The current negative sentiment presents an opportunity for value investors. Adding to holdings during periods of market pessimism can yield significant returns when the market corrects.
Conclusion
The vertical put option strategy on Li Auto was a calculated decision to generate income while limiting downside risk. Despite the short-term challenges and the stock’s recent decline, I maintain a positive long-term outlook for Li Auto. The company’s competitive positioning and the growing EV market in China provide a strong foundation for recovery and growth.
This strategy reflects a balanced approach to investment, combining income generation with risk management. As the maturity date approaches, I will monitor market developments and adjust my position as necessary to optimize returns and mitigate risks.
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