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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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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