Trading Strategies - Selling Puts on First Solar (Nasdaq:FSLR) PT IV

Apr 15, 2009
Author: SCP Editor

April 15, 2009 – On February 26, amidst a downward-trending market, we noted that First Solar’s (Nasdaq:FLSR) stock looked attractive at the $105 level, and suggested a hedged strategy to take advantage of the market weakness in the stock – selling the April 18 110 Puts for $15.40. The sale of puts at this point would have produced a premium to the seller of $15.40 while obligating the seller to purchase the stock (at a cost average of $96.40) if First Solar’s stock was trading sufficiently below the strike price of $110 on expiration day – April 18.

As of this morning, First Solar’s stock is trading at $149, up 41%. The April 18 110 Puts, which expire this week, are trading at $0.05. The profit potential of the Put strategy is limited to the premium received for selling the puts. The risk to the strategy is mitigated by the premium. If the stock gets put to the seller, it gets put to the seller at the strike price less the premium, effectively lowering the entrance point into the stock position accordingly.

This is a strategy that we recommend only on stocks that you want to own in any case, albeit at a lower price. In which case, you are getting paid to buy a stock you are amenable to in the first place. We also recommend this strategy in situations where the stock, and the broader market are showing weakness. This increases the premium of the option underlying the stock. The profit potential to being long the stock is unlimited.

But then, there is a greater amount of risk as well. The stock might decline precipitously from the purchase price. In which case, the stock purchaser would probably be hoping that she would have waited, perhaps buying the stock at a lower price. This is the appeal to selling puts on the stock. Again, it is a compelling strategy, in our view, when the markets are selling off and uncertain.

For more of our commentary on this strategy within the context of the First Solar trade click here.

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