To The Moon

Overview

On 15 July 2024, I initiated a vertical put option strategy on Nextracker by selling a put option with a strike price of $40 and buying a put option with a strike price of $35. This strategy, set to mature on 16 August 2024, allowed me to collect an option premium of $37 per contract. Below, I reflect on the strategy's rationale, performance, and potential outcomes.

Rationale Behind the Strategy

Market Conditions and Stock Performance

At the time of initiating the vertical put option, Nextracker was trading at $49.16 per share. The stock had shown a significant decline, dropping by 5.02%, which indicated heightened volatility and market uncertainty. However, the overall financial health and earnings report for Nextracker were strong, with the company reporting revenue of $25.00 billion, net income of $3.06 billion, and earnings per share (EPS) of $3.97. The gross profit was $8.13 billion, and the price-to-earnings (P/E) ratio was 14.60, suggesting a relatively attractive valuation.

Analyst Ratings

Institutional sentiment towards Nextracker was overwhelmingly positive, with 77% of analysts recommending a buy and 23% advising to hold. Notably, no analysts suggested selling the stock, which reinforced confidence in the company's future performance.

Analysis of the Option Strategy

Vertical Put Spread

A vertical put spread involves selling a higher strike price put option and buying a lower strike price put option. This strategy benefits from the net premium collected upfront and limits potential losses to the difference between the strike prices minus the premium received.

Strike Price of Sold Put Option: $40

Strike Price of Bought Put Option: $35

Premium Collected: $37 per contract

The maximum profit from this strategy is the premium collected ($37), which occurs if Nextracker's stock price stays above $40 by the maturity date of 16 August 2024. The maximum loss is limited to the difference between the strike prices ($40 - $35 = $5), minus the premium collected, resulting in a potential loss of $463 per contract.

Potential Outcomes

Stock Price Above $40

If Nextracker's stock price remains above $40 at expiration, both the sold and bought put options will expire worthless, and I will retain the full premium of $37 per contract as profit.

Stock Price Between $35 and $40

If the stock price falls between $35 and $40, the sold put option will be in the money, while the bought put option will provide a hedge, reducing the net loss. The exact outcome will depend on how close the stock price is to the strike prices at expiration.

Stock Price Below $35

If Nextracker's stock price drops below $35, both options will be in the money. The loss will be limited to the difference between the strike prices minus the premium received, resulting in a maximum loss of $463 per contract.

Conclusion

The vertical put option strategy on Nextracker was executed based on a combination of current stock performance, financial health, and positive analyst ratings. While the recent price decline indicates volatility, the overall strong financials and favorable market sentiment suggest that the stock is likely to stay above the $40 strike price, allowing for the retention of the full premium.