Option Investor

Portfolio Activity

Printer friendly version

New Portfolio Position

With the major equity indexes continuing to suffer from the effects of an impending recession, our focus this week will again be on a stock that should be less influenced by the broader market gyrations. This company is Canadian Solar (NASD:CSIQ) and the position we have in mind is a moderately aggressive covered-call that offers a balance of downside protection and profit potential.

Buy CSIQ Stock: Last Price = $24.08
Sell MAY-22.50 Call (GQA-EX) Bid Price = $3.20
Cost Basis = $24.08 - $3.20 = $20.88
Downside Protection = 13.28%
Maximum Profit = 7.75% (without margin)

The target entry price in this example trade will be:

Net Debit = $20.75
Downside Protection = 13.83%
Maximum Profit = 8.43% (without margin)

Although CSIQ is listed as a technology/semiconductor company, the movement of the stock's price is related in large part to energy prices. Considering this fact, the covered-call may be more appropriate for those who have a bullish outlook for that sector/industry group. We'll monitor the position in the coming week to determine if an entry is possible. A stop-loss transaction (or position adjustment) should be initiated if CSIQ's share price closes below $19.50 - $21.00, depending on each individual investor's risk versus reward tolerance.


Regarding the current issues in our (hypothetical) covered-call portfolio, here is situation for each trade:


LONG EGY Stock and SHORT MAY-5.00 Call
Cost Basis = $4.50
Maximum Profit = 11.1% (without margin)
EGY stock closed at $5.58 on 4/11/08, thus no action is needed.


LONG PGI Stock and SHORT MAY-$15.00 Call
Cost Basis = $13.50
Maximum Profit = 11.1% (without margin)

PGI stock closed at $14.45 on 4/1108, thus no action is needed but we will monitor the issue closely for further signs of downside (selling) pressure. Current technical support is near $13.60.


LONG CCC Stock and SHORT JUL-$15.00 Call
Cost Basis = $14.15
Maximum Profit = 6.00% (without margin)

CCC stock closed at $13.99 on 4/11/08, near the bottom end of a 5-month lateral trading range. The CCC position has been rolled down and forward to the JUL-$15.00 strike due to previous unfavorable price activity and we were monitoring the issue for a close below $14.00. Since Friday's sell-off breached that level, the most prudent action (for conservative investors) would be to exit the position on any further downside activity. However, since the broad market movement at the end of the week was somewhat exaggerated, it may be best to use any ensuing bounce to sell the stock (if the recovery is not sustained). Currently, the JUL-$15.00 call is trading at $1.20 X $1.45, thus a net-credit closing trade would yield a loss of approximately $1.50 per share. While further declines (and the passage of time) will reduce the cost of repurchasing the sold calls, we do not recommend leaving a short option uncovered for more than a few days as the losses can increase exponentially if the stock price rebounds.


LONG KGC Stock and SHORT APR-22.50 Call
Cost Basis = $21.85
Maximum Profit = 2.90% (without margin)

KGC stock is trading near $22.75 as of 4/11/08, however the position has previously been closed due to short-term bearish activity.


Covered Call System Newsletter Archives