Investment Reflection on Li Auto Put Option Rollover
Overview
On August 30, 2024, I decided to roll over 1 contract of Li Auto (LI) $Li Auto(LI)$
Li Auto's Second Quarter Performance
Li Auto’s second-quarter results presented a mixed bag of opportunities and challenges:
Vehicle Deliveries: The company reported a year-over-year (YoY) increase in vehicle deliveries by 25.5%. This growth signals a continued demand for Li Auto’s offerings despite a challenging environment.
Net Income and Margins: Net income dropped significantly by 52.3% YoY, which reflects the broader pressures in the EV market. The gross margin also decreased to 19.5%, down from 21.8% a year ago, due to rising operating expenses and slower sales growth. This decline in profitability could put downward pressure on the stock price.
Sales Performance: Although sales grew by 10% YoY to $4.4 billion, surpassing Wall Street’s expectations of $4.31 billion, the slower pace of growth and rising costs may temper investor enthusiasm.
Strategic Insights and Market Position
Despite the headwinds, Li Auto has demonstrated resilience, navigating the competitive EV market with strategic moves aimed at long-term growth. The company’s third-quarter guidance suggests optimism, with expected vehicle deliveries showing strong YoY growth of 38% to 47.5% and sales forecasted to rise between 13.7% and 21.6%.
Even with intense competition from heavyweights like BYD and Tesla, Li Auto has managed to position itself as a key player in the higher-end NEV market, which could support its future growth. The ability to maintain profitability, albeit with slimmer margins, sets it apart from many other EV makers.
Rationale for the Option Rollover
Rolling over the put option to December 2024 allows me to extend my position, providing additional time to capture potential downside in Li Auto’s stock price should the market react negatively to its financial challenges or broader economic conditions. By collecting an option premium of USD 65 per contract, I also enhance my income from this position, helping to mitigate the risks associated with the investment.
Given Li Auto’s solid guidance, there is a possibility that the stock might recover or even rally, making the put option less valuable. However, the potential for continued margin pressure and competitive challenges provides a reasonable basis to anticipate that the stock could face further volatility, justifying the rollover strategy.
Conclusion
The decision to roll over the Li Auto put option was driven by a strategic assessment of the company’s current financial standing and future outlook. While Li Auto continues to demonstrate resilience in a tough market, the significant drop in profitability, coupled with competitive pressures, presents a compelling case for maintaining a cautious stance. By extending the maturity of the put option, I aim to capitalize on any potential downside while still benefiting from the premium collected, balancing risk with potential reward.
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