What is a “Put”?
A put is an offer to buy a set number of shares at a predetermined price by a set date. This is different from buying the shares or using limit orders to buy the shares. In today’s example, I could enter a buy limit order to buy 100 NIO shares at $34 per share. It seems unlikely that someone will sell at that price today. As an alternative, I can sell a put that is secured by cash I have in my account. If the put is for 100 shares at $34 per share, then I need to have $3,400 available to buy the shares if the price drops to $34 or lower.
You earn a premium from selling a put. This creates an obligation to buy the underlying security at a predetermined price. I must maintain the cash for this obligation until the contract ending date. If the sale of the put is executed, the seller earns a premium immediately. At any point up to expiration, your obligation may require you to buy the security below its current market price.
This strategy offers benefits and significant risks. For example, if the price of the NIO shares drops to $20 per share, I still am obligated to buy the shares for $34 per share. This type of transaction is not for the faint-hearted and is definitely a higher risk transaction than a covered call.
Why NIO Shares?
NIO is an international growth stock. NIO Limited designs, manufactures, and sells electric vehicles in the People’s Republic of China, Hong Kong, the United States, the United Kingdom, and Germany. The company offers five, six, and seven-seater electric SUVs. It is also involved in the provision of energy and service packages to its users; marketing, design, and technology development activities; manufacture of e-powertrains, battery packs, and components; and sales and after sales management activities.
In addition, the company offers charging solutions, including Power Home, a home charging solution; a battery swapping service; a mobile charging service through charging trucks; a public fast charging solution; a 24-hour on-demand pick-up and drop-off charging service. NIO Limited was founded in 2014 and is headquartered in Shanghai, China.
The following images are from Fidelity’s Active Trader Pro app. I use this app for most of my buy/sell orders and for options trading.
Benefits and Risks of the Put
Benefits: 1) You earn the income from the premium, even if you do not have to purchase the security. 2) You may secure a lower price to purchase a security that you want to add to your investment portfolio. I am more interested in NIO than I am in Tesla (TSLA) as an investment.
Risk: If the security value drops significantly below my strike price (even to $0), I am obligated to purchase the security at my promised, contracted, strike price. In other words, I could lose my entire $3,400 if the price of NIO drops to $0 in the next two days.