Roll Forward and Down 1 Credit Spread on LI – 17.51% potential income return in 70 days

On February 25, 2021, we sold 2 put options from our ratio back spread on LI stock, we constructed earlier at the start of the month, and on February 26, we bought back 1 bull put credit spread on Li stock, and additionally sold 1 new bull put credit spread with lower strikes prices and expiry further out (roll forward and down). The aftermath of this trade $507.8 (after commissions)

We usually roll forward only covered calls, but with market prices tanked and not willing to take assignment now as it would increase drastically our margin, it was agreed to roll forward a credit spread for a credit.

Also, we feel glad, we constructed original trade as a ratio put back spread, see: Sold Put Bull Ratio Back Spread on LI – 1.39 % potential income return in 21 days

Yesterday, with LI stock dipping well below under our prtective puts,we managed to sell them both and earn quite nice $242.40 downside protection

Li Auto Inc., also known as Li Xiang, is a Chinese electric vehicle manufacturer headquartered in Beijing, with manufacturing facilities in Changzhou.

Here is our trade setup:

  • SLD  2  LI  FEB 26 '21 27 Put Option  2.00 USD
  • BOT  1  LI  FEB 26 '21 30 Put Option  5.12  USD 
  • BOT  1  LI  APR 16 '21 - 29 + 15 Put Bull Spread  -5.90  USD

In the aftermath for this trade, we got a total premium of 507.8USD (after commissions) or 17.51% potential income return in 70 days (if options expire worthlessly).In other words, we bought some time and lowered our strike price from $30 to $29, and made some nice downside protection income.

These trades come as the #55 and #56 in the month of February

What happens next?

On the expiry date (April 16, 2021) LI is trading above $29 per share -  options expire worthlessly and we keep premium, realizing our max potential from this trade. If LI trades under $29 on the expiry date, we get assigned.

But as we already have collected a premium of $5.07 per share, our break-even price for this trade then is $29-$5.07= $23.93

As we are selling credit spreads, our max risk is defined, in case the stock will drop below $15, our second bought put will work as insurance and will minimize our potential losses.

In case of assignment, we are ready to spend $2,900 to buy 100 shares with LI stock

Selling credit spreads with LI stock
Selling credit spreads with LI stock

  • Running Total  22 Trades since January 19, 2021
  • Options income $1,312