Yesterday morning I decided to write November 55 calls against my China Digital TV (NYSE:STV) position at a premium of $6. I did this for two main reasons: first, I wanted to go short volatility, and second, I wanted to add a bit of downside protection and create revenue out of this position.
The STV November 55 calls were trading at a huge premium considering that they are more than $5 out of the money, mainly because of the volatility in the stock since its IPO. However, I’m seeing a few signs of decreasing volatility in STV individually, and I believe this is likely to continue as volume decreases in the name. Additionally, volatility in the overall market has spiked 10 percent today, and I’m playing this as if volatility will decrease again following this spike.
In addition, while writing these calls limits my potential upside, it also generates a significant amount of revenue for my portfolio and helps to add a cushion against downside in the stock. I still have significant upside potential left here, and I believe the trade-off of limiting my upside beyond $55 is worth the downside protection.