To The Moon

Overview of Strategy

On November 12, 2024, I implemented a put-selling strategy on C3.ai, Inc. (AI) by selling a put option with a strike price of $20, expiring on December 20, 2024. At the time of selling the put, C3.ai's stock price was $27.28, and I collected an option premium of $26. The strategy was based on C3.ai's recent stock performance, upcoming earnings, and a willingness to acquire shares at a discounted price if assigned.

Analysis of C3.ai’s Recent Performance and Market Sentiment

C3.ai, Inc. operates in the artificial intelligence software sector, providing AI and machine learning applications across various industries. The company's stock is often subject to high volatility, driven by market sentiment toward AI technology and C3.ai’s financial performance.

Stock Performance: At the time of the trade, C3.ai's stock had recently closed at $27.79, marking a 1.42% decline from its previous close. Over the past month, C3.ai shares had gained 2.21%, which lagged both the Computer and Technology sector’s gain of 3.2% and the S&P 500’s gain of 3.3%. This relatively modest performance reflects a tempered market sentiment toward C3.ai in the short term, as investors weigh both the potential of AI technology and the company's current financial challenges.

Earnings Outlook: C3.ai is scheduled to release its earnings on December 9, 2024, just before the option’s expiration. Analysts project an EPS of -$0.16, a decline of 23.08% year-over-year, suggesting ongoing profitability issues. On the positive side, revenue is expected to grow by 24.28%, reaching $91.01 million. This mixed outlook highlights both the company's challenges in achieving profitability and its potential to drive top-line growth.

Sector and Market Environment: The tech sector, and particularly AI stocks, have been in the spotlight as investors increasingly recognize AI's transformative potential across industries. However, C3.ai’s fundamentals have raised concerns, as profitability remains elusive, which may explain why its stock price growth has lagged behind broader market indices.

The Option Outcome and Strategy Reflection

Selling the put option at a $20 strike price provided an attractive income opportunity through the $26 premium collected. This strategy hinged on the assumption that C3.ai’s stock would remain stable above the $20 strike by expiration or, if assigned, that the acquisition price (adjusted for premium) would be favorable given C3.ai’s long-term growth potential.

Key Considerations:

Premium Income and Break-Even Analysis: The $26 premium collected provided immediate income and effectively reduced my break-even point to $19.74 ($20 strike price - $0.26 premium), lowering the downside risk associated with assignment. This substantial premium offered a buffer against stock volatility and aligned with my strategy of potentially buying C3.ai shares at a significant discount.

Earnings Event as a Potential Catalyst: The put option's expiration date of December 20, 2024 was set shortly after C3.ai’s earnings release on December 9, 2024. Earnings announcements often trigger significant price movements, particularly for companies like C3.ai that are in high-growth but unprofitable phases. If earnings exceed expectations, the stock could appreciate, resulting in the option expiring worthless and allowing me to retain the full premium. Conversely, disappointing earnings could increase the likelihood of assignment, but with a favorable entry point below $20.

Downside Risk and Sector Volatility: Selling a put on a high-volatility stock like C3.ai carries inherent risks, particularly given the AI sector's sensitivity to market sentiment and earnings performance. The tech-heavy Nasdaq’s recent performance shows some stability in the sector, yet the risk of a post-earnings drop remains, especially with the projected decline in EPS. If the stock falls significantly below $20, I could face a short-term unrealized loss if assigned.

Long-Term Investment Potential: C3.ai’s revenue growth of 24.28% year-over-year signals a strong demand for its AI solutions, positioning the company for future growth as the AI industry matures. While current profitability remains an issue, the company’s potential as an AI leader may lead to future stock appreciation. If assigned, holding C3.ai shares long-term could allow me to capitalize on the broader AI trend, provided the company can improve margins and work toward profitability.

Reflection on the Strategy's Effectiveness

Overall, this put-selling strategy on C3.ai aligns with my investment goals by generating income through premium collection while offering a potentially favorable entry into an AI-focused company at a discount. However, the outcome will largely depend on C3.ai’s performance in its upcoming earnings and the market's reaction to its financial metrics.

The $26 premium collected provides a strong income cushion, reducing the break-even point and mitigating downside exposure. This is particularly valuable given the stock's high volatility and sensitivity to earnings announcements.

If C3.ai’s earnings report shows positive surprises, the option could expire worthless, resulting in a successful trade with full premium income retained. Conversely, if earnings disappoint and the stock drops below $20, I would be assigned shares but still acquire them at a favorable adjusted price of $19.74. In that scenario, holding the shares could offer long-term growth potential, particularly if C3.ai eventually turns profitable.

Conclusion

This put option strategy on C3.ai reflects a balanced approach to capturing income while positioning for potential upside in the AI sector. Selling puts on a high-growth, high-volatility stock like C3.ai involves elevated risk, but the premium collected provides a cushion and a lowered entry point. With C3.ai’s earnings event approaching, the strategy remains adaptable to both positive and negative outcomes.

In a nutshell, this put-selling strategy successfully generates income while opening a pathway to own shares in a promising AI company at a discount, reinforcing the value of options as a flexible tool for income generation and strategic positioning in growth stocks.

$AI 20241220 20.0 PUT$