Options Trading News

October 16, 2013  Wed 4:14 AM CT

An investor wants to turn time into money with SunPower

optionMONSTER's tracking systems detected the purchase of 6,850 January 28 calls for $5.30 and the sale of an equal number of March 28 calls for $6. Volume was below previous open interest in the January strike but above it in the March contracts, which suggests that an existing short position was closed and rolled forward.

The investor probably owns shares in the solar-energy company and sold the options as part of a covered-call strategy. That lets the trader collect income while holding the stock but requires him or her to sell shares above the $28 strike price. The choice of in-the-money contracts is highly conservative, affording them significant cushion in case the stock falls.

Rolling the position generated an additional $0.70 of income. Repeating the trade roughly every two months would let them collect $3 or $4 per year, more than 10 percent of the stock's price. The investor can also withstand a drop of almost 20 percent in the underlying valuation without their capital being at risk. (See our Education section)

SPWR rose 1.85 percent to $30.91 yesterday and is up 31 percent in the last month. It's been running along with other solar stocks, making them the second-best performing group on our researchLAB market scanner since mid-September, as shown on the graphic below.

Total option volume was more than twice the daily average in the name, with calls dominating the action.

(Graphic courtesy of researchLAB)
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The covered call and unhedged risk

I have written a few things on the Covered Call Strategy over the last two weeks. Please understand that those two previous articles plus this one do not constitute a proper, fully in-depth lesson on the Covered Call Strategy like we have in our classes at Option Monster Education. I have picked out a few topics that I believe were worth noting and today I am going to add the final one.

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