Options 101 – Our First Options Trade: Sold March 45 Calls of Suntech Power Holdings (STP)

We sold Suntech March 2008 45 Calls at $5 per share. Options by nature are a risky play as under certain circumstances the loss can be unlimited. The options we wrote are considered covered, as we own the underlying stock in the portfolio. This strategy essentially lowers the risk.

As our analysis indicated, we are not especially bullish of our Suntech holdings. With this option, we are betting on the stock’s stagnancy for the coming six months.

Here is a quick analysis of how this could play out:

• The option expires worthless: This is a possibility only if the option is not exercised between now and next March and the stock closes below $45 on the date of expiration.
• The option is exercised: We will realize a total profit of 42%.

Either scenario lowers our cost basis by $5 per share although taxes would take away its due.

The analysis makes it clear why it is not desirable for the stock price to fluctuate wildly in this period. Also worth harping is that we are not protected on the downside - selling the underlying shares in the ensuing time could pave way for us being short, as we would have to buy the shares to deliver to the option holder, should they choose to exercise.

If the option expires worthless, the holder stands to lose his investment resulting in 100% loss. Opportunity for profit exists only if the options get exercised when the stock price is above $50. It could get exercised at a loss between $45 and $50. The loss increases at 20% for every dollar below $50. By the same chalk, profit increases by an additional 20% for every dollar increase in the share price of Suntech above $50.

The list of stock/options sold during the year and the gain/losses are listed below:

Stock	Buy Date	Buy Price	Sell Date	Sell Price	% Gain (Loss)	% Portfolio Return*
Harrah’s (HET)	10/2/2006	75.61	8/7/2007	83.68	10.66	0.62
St. Joe (JOE)	8/7/2007	39.4	8/8/2007	41.8	6.23	0.47
Google (GOOG)	3/14/2007	441	8/10/2007	515.99	16.86	1.14
LOCM (LOCM)	8/10/2007	5.47	9/17/2007	6.094	11.31	0.71
PetroChina (PTR)	9/12/2006	106	10/1/2007	188.5	78.14	2.85
PetroChina (PTR)	9/12/2006	106	10/3/2007	178.05	68.39	2.22
ValueClick (VCLK)	9/12/2007	19.4	10/12/2007	28.28	45.79	3.4
Suntech March 45 Call	-	-	10/15/2007	5.00	-	-
Realized Gain/(Loss) YTD	-	-	-	-	-	11.41

• % Gain/Loss Relative to Portfolio Value at Beginning of Year + Deposits
• The table assumes realization of profits associated with selling options only after the option is exercised or expiry.