Nio (NIO) stock currently has one of the highest levels of implied volatility of popular stocks.
That means one thing for sure — juicy option premiums.
Implied volatility for NIO stock is currently at 98%, which is lower than it was a few months ago, but still very high. Microsoft (MSFT) stock, for example, has implied volatility of only 30%.
High volatility also means higher risk and a stock price that is likely to see large price swings in either direction. That being said, I thought it would be interesting to look at a cash secured put trade on NIO stock to see how much premium is available.
As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price, and collect the option premium in the process.
It’s important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Nio Cash Secured Put Option Trade
Let’s assume we’re happy to buy 100 shares of NIO stock at a price of 55. Selling a Feb. 19 55 put would generate $425 in premium if sold for 4.25. This would give a break-even price of 50.75.
If the put were to expire worthless, that would represent an annual return of 82% calculated as follows:
Premium (425) / Capital at risk (5,075) x days in a year (365) / days until option expiration (37).
Instead of selling a one month put, what would it look like if we sold a longer term put? Let’s take a look.
The Jan. 21, 2022, put with a strike price of 55 is trading for around 17.55 which gives a break-even price of 37.45.
While there is a long time to expiration, the annualized return is still quite good at 45.86% with a much lower break-even price.
The calculation is: Premium (1755) / Capital at risk (3745) x 365 / 373
Selling short term puts results in a higher annualized return but a higher break-even price.
Longer term puts have a lower annualized return but also a lower break-even price.
Each investor should find a style that suits them, and I hope you enjoyed analyzing the difference between these two ideas on NIO stock.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
YOU MIGHT ALSO LIKE: