Li Auto(LI) Earnings Ahead! How to Position with Options?
$Li Auto(LI)$ will release its Q2 earnings report before the market opens on August 28. The company’s last quarter was disappointing, with both revenue and net profit falling short of expectations, and it announced an 18% workforce reduction.
Initially, the 2024 delivery forecast was set at 800,000 vehicles, but by early June, it was revised down to 480,000 vehicles.
After a weak and disappointing Q1 in 2024, there has been some positive news recently: Li Auto’s sales data rebounded strongly. In June and July, Li Auto delivered 47,774 and 51,000 vehicles, respectively, compared to 20,251 in February.
For Q2, Li Auto delivered 108,581 vehicles, aligning with the management's forecast of 105,000 to 110,000 vehicles shared during the Q1 earnings call. The Q2 delivery numbers also showed significant improvement from Q1’s 80,400 vehicles, driven by seasonal factors and the launch of the Li L6.
However, the new all-electric model, the MEGA, appears to be struggling. Looking ahead to the expected Q2 results, management has provided revenue guidance, estimating revenues between ¥29.9 billion RMB ($4.19 billion) and ¥31.4 billion ($4.4 billion).
Li Auto will report its earnings before the market opens on August 28, 2024. Over the past 12 quarters, the options market has overestimated the stock’s earnings volatility 67% of the time. The average post-earnings volatility forecast has been ±9.1%, while the actual average volatility has been 7.1% (in absolute terms).
In the past five quarters, Li Auto’s stock has experienced swings of +13.9%, -8.6%, -4.3%, +18.8%, and -12.8%. Given the volatility, the expected earnings volatility for this report is ±9.1%. Historically, options have often overestimated earnings volatility, though recent quarters have seen increased volatility, making both long and short volatility strategies potentially viable.
For investors looking to navigate this high-volatility earnings opportunity, a strategy with a higher margin of safety might be to short volatility.
How to Execute a Strangle Option Strategy?
Using $Li Auto(LI)$ as an example: On August 26, Li Auto's closing price was $20.73. Li Auto’s past five earnings reports have shown volatility mostly between 13% and 14%.
Based on historical volatility, we can bet that Li Auto’s stock price post-earnings will be between $18 and $24. We can set up a strangle option strategy by selling the following options:
Step 1: Sell a call option with a strike price of $24, betting that the stock won’t exceed $24, and receive a premium of $16.
Step 2: Sell a put option with a strike price of $18, betting that the stock won’t fall below $18, and receive a premium of $14.
Once these two trades are completed, the strangle strategy is in place. If Li Auto’s stock price falls between $18 and $24 after the earnings report, you’ll make $30.
With 100 shares of Li Auto worth $2,073, a $30 profit represents a 1.4% return. This risk-reward profile looks reasonable. However, be aware that if Li Auto’s stock experiences significant price swings, you could face substantial losses.
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