Overview
On May 10, 2024, I executed an options strategy by selling one LEAP AI $C3.ai, Inc.(AI)$
Strategy Rationale
Selling a cash-secured put option was chosen for its potential to generate income while taking on limited risk. Here’s why this strategy made sense:
1. Income Generation: By selling the put option, I received an immediate premium of $297, providing an upfront profit that could be utilized or reinvested.
2. Market Position: The strike price of $22.50 was selected based on the belief that AI stock would remain above this level, considering its strong performance and positive outlook.
3. Risk Management: The cash-secured nature of the put option meant that I was prepared to purchase 100 shares of AI at $22.50 if the stock fell below this price, which I deemed an acceptable entry point given my confidence in the company’s prospects.
Execution and Market Reaction
On May 30, 2024, AI stock surged to $28.57 following an impressive earnings announcement. This positive movement significantly decreased the value of the put option, allowing me to close the position for $135. This resulted in a net profit of $162 ($297 - $135) from the option premium.
Outcomes and Learnings
1. Profit Realization: The decision to close the position early capitalized on the reduced option premium, securing a profit without waiting until the option's expiration. This flexibility in managing the position helped lock in gains.
2. Market Timing: The earnings announcement acted as a catalyst, driving the stock price higher and benefiting the strategy. Recognizing and acting on this positive momentum was crucial to the successful outcome.
3. Risk and Reward Balance: The cash-secured nature of the put option provided a clear risk management framework, ensuring that I was prepared to purchase the stock at a favorable price if necessary.
Conclusion
Selling the LEAP AI cash-secured put option proved to be a profitable strategy, generating a net profit of $162 in a short period. This experience underscores the importance of understanding market conditions, selecting appropriate strike prices, and remaining agile in response to market movements. The successful execution of this options strategy reinforces the value of combining income generation with prudent risk management in investment decisions.
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