Why I Decided to Sell Put Options on NIO: A Strategic Move in a Volatile Market

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Nio Inc. (NYSE: NIO), a Chinese electric vehicle (EV) manufacturer, has been a stock I’ve traded options with great success in the past. At one point, NIO reached an all-time high of about $60 per share, reflecting the market's enthusiasm for EVs and Nio's potential. 

However, as market conditions have shifted, so has my strategy. While I remain optimistic about NIO's long-term prospects, my current approach involves selling put options to generate income and strategically acquire shares.

Nio Inc., headquartered in Shanghai, specializes in designing and developing electric vehicles. The company is notable for its innovative battery-swapping technology, offering an alternative to conventional charging stations. Since its inception, Nio has raised over $5 billion from investors, positioning itself as a formidable player in the EV market.

My Decision to Sell Put Options on NIO

Having traded NIO successfully in the past, I am familiar with its potential and the market’s reaction to its growth. Despite its impressive run to $50 per share, the stock has experienced significant volatility. Drawing an analogy to the cryptocurrency market, I recognize that NIO could once again "shoot for the stars" and reach $40-$50 per share. However, in the current market environment, I prefer a more cautious and income-generating approach.

On May 6, 2024, I purchased 5 shares of NIO at $5.72 per share for our stock portfolio, marking the beginning of a dollar-cost averaging strategy. To finance this purchase, I sold a put option on NIO, which provided a 6% potential income return over 46 days. This put-selling strategy aligns with my goal of accumulating NIO shares at favorable prices while generating income from the premiums.

Advantages of Put Selling

  1. Income Generation: Selling put options allows me to collect premiums, providing immediate income. In this case, the 6% return over 46 days is an attractive income stream.
  2. Strategic Entry: If the put options are exercised, I acquire NIO shares at a lower price, effectively reducing my cost basis. This approach aligns well with my cautious optimism about NIO's future potential.
  3. Flexibility: If the options expire worthless, I simply keep the premium and can sell more puts, continually generating income while waiting for an optimal entry point.

Building Towards Covered Calls

My current position includes 5 shares of NIO, with a goal of accumulating 100 shares to enable selling covered calls. Covered calls offer another layer of income generation and risk management.

  • Potential Covered Call Income: If I had 100 shares of NIO today, I could sell a covered call expiring on June 7, 2024, with a strike price of $6, to receive a $0.46 premium. If the shares were called away at expiry, I would realize $74 in income from my total investment.
  • Lowering Cost Basis: If the options expire worthless, I pocket $46, approximately 8.04%, and continue writing additional call options. This strategy would lower my cost basis to $5.26 per share, enhancing my position's profitability.

Selling put options on NIO represents a strategic and calculated approach to investing in a volatile market. By generating income from premiums and strategically acquiring shares, I can take advantage of market fluctuations without committing to an immediate large-scale purchase. This method not only provides a steady income stream but also positions me to benefit from potential future gains in NIO’s stock price.

As we continue to hold 5 shares of NIO in our stock portfolio, utilizing dollar-cost averaging with an average cost of $5.72 per share, we are well-positioned to adapt to market changes. With 95 shares to go before we start selling covered calls, this strategy allows us to navigate the market with caution and optimism, leveraging NIO’s potential while managing risk effectively.