My $16,000 Bet on Nio (NYSE:NIO) Stock

I’m alerting you to a high-yield trade I made this past Friday…

While the majority of my investments are in high-quality dividend growth stocks, there is indeed a place in my portfolio for more speculative stocks that offer greater return potential and/or high income in the short term.

With this in mind, I recently placed a bet on Chinese electric vehicle (EV) maker Nio (NIO).

At the time I placed my trade last last Friday, Nio was selling for $49.62 per share and the May 21, 2021 $20 put options were going for $1.29 per share.

My trade involved selling eight of these put options…

There are two probable ways this trade will work out…

Scenario 1: NIO falls below $20 by May 21, 2021
If NIO falls below $20 by May 21, I may be obligated to buy 800 shares at $20 per share… which is a $16,000 commitment.

In exchange for my agreement to that potential purchase obligation, I was paid an instant $1,032 (800 shares X $1.29 per share).

This money was immediately deposited into my 401(k) retirement account, where I made the trade.

Taking this income into consideration, my cost-basis on NIO would drop to $18.71 per share.

That’s a 62.3% discount to the $49.62 share price that NIO was selling for at the time I made this trade last Friday.

Scenario 2: NIO stays above $20 by May 21, 2021
If NIO stays above $20 by May 21, the contract expires worthless and I get to keep the $1,032 in income.

This works out to a 6.5% return on what my purchase obligation would have been ($1.29 / $20) in 26 weeks.

If I can repeat these results over the period of a year I could generate a 12.9% yield from NIO without even buying shares. The neat thing about this trade is that it makes money if the stock goes up… stays flat… or even drops as much as 62% by May 21.

Greg Patrick

P.S. When it comes to selling puts, I’ve developed a few rules that fit my portfolio objectives. I only sell a put option if:

  1. I want to own the underlying stock anyways
  2. I’ll be buying the stock at a reasonable price (which is typically fair value or better)
  3. The strike price of the option I’m selling is At-The-Money (ATM) or Out-of-The-Money (OTM)
  4. I’m comfortable owning the stock for the long-haul in case the price drops significantly below my strike price
  5. I’m comfortable “letting the stock get away from me” if I don’t get “put” shares and the stock takes off
  6. My position-sizing makes sense if I’m “put” the shares
  7. I can make the trade in a retirement account, such as an IRA or 401(k) to minimize taxes and tax paperwork. 
Please keep in mind that these trade alerts are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. The ideas we publish are simply ideas that we feel fit our specific needs and that we’re personally making in our own portfolios. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we make our trade to the time you’re alerted about it. So please don’t attempt to make this “High-Yield Trade” yourself without first doing your own due diligence and research.
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