Overview of the Strategy
On May 15, 2024, I executed a vertical put spread strategy involving AI $C3.ai, Inc.(AI)$ stock. This strategy entailed selling a put option at a strike price of USD 22 and simultaneously buying a put option at a strike price of USD 21, both with a maturity date of June 21, 2024. The initial trade resulted in a net credit of USD 25. This vertical put spread was chosen with the expectation that AI stock would remain above the higher strike price of USD 22, allowing the options to expire worthless and enabling me to retain the premium collected.
Execution and Market Conditions
The trade was well-timed as AI stock surged following its earnings announcement. On May 30, 2024, AI's stock price rose to USD 28.57, significantly above both the strike prices of the options involved in the spread. This movement provided an opportunity to close the position early. By paying USD 6 to close the spread, I locked in the profit from the trade.
Profit and Loss Analysis
Here’s a breakdown of the financials involved in this strategy:
- **Initial Premium Collected**: USD 25
- **Cost to Close Position**: USD 6
- **Net Profit**: USD 19
Reflection on Strategy Performance
Timing and Market Movement
The decision to enter a vertical put spread on AI stock ahead of its earnings announcement proved to be astute. The significant price surge following the earnings report worked in my favor, enabling a profitable early exit from the trade. The underlying assumption that AI stock would remain above the sold put strike price was validated by the strong market reaction to the earnings results.
Risk Management
This strategy inherently limited potential losses, as the maximum risk was confined to the difference between the strike prices minus the net premium collected (USD 100 - USD 25 = USD 75). By closing the position early, I effectively mitigated any further risk, even though the market movement was already highly favorable.
Strategic Insights
The success of this trade underscores the importance of:
1. Earnings Anticipation: Entering the position ahead of a significant corporate event like an earnings announcement can enhance the potential for favorable market movements.
2. Risk-Limited Strategies: Employing a vertical spread provided a controlled risk environment, making it an appealing strategy for uncertain market conditions.
3. Active Management: Monitoring the position and capitalizing on significant price movements allowed for an optimal exit and maximized profit.
Conclusion
This investment in the AI vertical put option strategy yielded a positive return, with a net profit of USD 19, reflecting a successful execution and strategic planning. The ability to anticipate market movements around key corporate events and employing strategies that limit potential downside risk proved effective. Future investments will continue to leverage these insights, focusing on disciplined entry and exit points to maximize returns while managing risk effectively.
$AI VERTICAL 240614 PUT 21.0/PUT 22.0$
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