AI Stock: Could this Options Combination Trade Unlock a Large Profit?

C3.ai (AI) stock was down 11% on Friday and had a rough week overall. 

By using a combination of option strategies, we could potentially buy the stock for a significant discount, or achieve a healthy profit if the stock trades sideways.

Here’s the trade:

Sell to open the AI July 21 put with a strike price of 30, which was trading around $2.05 on Friday.

Then, add a bear call spread:

Sell to open the AI July 21 call with a strike price of 39, which was trading around $2.00 on Friday.

Buy to open the AI July 21 call with a strike price of 41, which was trading around $1.60 on Friday.

The sold put brings in around $205 in option premium, and the bear call spread adds another $40 in premium. In total, the combination of the two trades generates $245 in premium.

Here’s how the trade looks at trade initiation. The blue line represents the profit or loss at expiration and the purple line shows the trade as of today.

The position starts with a delta of 25, meaning it is roughly equivalent to owing 25 shares of AI stock. This figure will change as the trade progresses.

This is how the trade could look in around three week’s time.

Possible Scenarios For This AI Stock Option Trade

Let’s work through a couple of scenarios of how this trade could look at expiration on July 21.

- If AI stock trades sideways and finishes between 30 and 39, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $245.

- IF AI falls below 30 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at 100. However, our net cost basis will be 27.55, thanks to the $245 in option premium received. That is 17.5% below the closing price on Friday.

- If AI rallies above 41, the bear call spread will suffer a full loss of $200, but this will be fully offset by the $245 premium received, leaving the trade with a small gain of $45.

Company Details

AI is currently rated a Strong Buy. The Barchart Technical Opinion rating is an 88% Buy with a strengthening short term outlook on maintaining the current direction. 

Of 12 analysts covering AI stock, 2 have a Strong Buy rating, 6 have a Hold rating, 2 have a Moderate Sell rating and 2 have a Strong Sell rating.

Implied volatility is 104.72% compared to a twelve-month high of 230.47% and a low of 58.95%. That gives AI stock an IV Percentile of 78% and an IV Rank of 26.69%.

C3.ai Inc. is an enterprise AI software provider for accelerating digital transformation. 

C3.ai delivers the C3 AI Suite for developing, deploying and operating large-scale AI, predictive analytics and IoT applications. 

The core of the C3.ai offering is a proprietary, model-driven AI architecture which enhances data science and application development. 

C3.ai is based in Redwood City, United States.

Summary

While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own.

If you end up being assigned, you can start selling covered calls against the stock position.

You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.

Mitigating Risk

With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.

Some traders like to add a deep out-of-the-money long put to reduce risk. For example, a July 21 put option with a strike price of 20 could be purchased for around $15. Buying this put, would cap losses below 20 and reduce total capital at risk.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.