Why I'm Writing Calls Against My China Digital TV Position

Yesterday morning I decided to write November 55 calls against my China Digital TV (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.

Comments

[Uncle Bill:]

Yesterday you said it was a great stock, and today you're selling calls on it. First of all, those calls do not carry a "huge premium." The implied volatility is incredible, which means you've selected the riskiest issue to invest in at a time when the market is about to crash. The premium is equal to the risk, according to the market. Second, implied volatility drops as stocks rise and gains as stocks fall. So if the stock crashes, your short calls will rise in value as the implied volatility increases, taking away a nice part of your profits. Finally, the profit/loss graph of the covered call, which you have created, is the same as the profit/loss graph for the short put. Is that really where you want to be, short puts -- limited upside, downside limited only by stock price -- on one of the riskiest stocks in one of the riskiest sectors in the market?

2007 Oct 16 11:01 AM

[day trading...:]

I bought in at IPO, and the stock raced to $50. I put a sell order in at $45 or $60, whichever came first. It's been hovering around $50 since. I'll wait and see. Looking forward to LFT, the next Chinese IPO whose numbers and prospects look great!

2007 Oct 16 02:18 PM

[zeeman7:]

I SAW THE CEO OF STV INTERVIEWED IN BLOOMBERG ON THE
THE DAY IT WAS LISTED ......
HE STATED THE FOLLOWING"Expect a promising growth along with
acquiring companies to strengthen Balance sheet".

2007 Oct 17 03:46 PM

[TekToniKshift:]

STV is fundamentally strong. The build out of digital cable TV in China is just beginning and China represents the largest and fastest growing market for these types of conditional access modules. STV's technology is proven and well accepted.
Look for accelerating earnings growth for the next 6 - 12 months.

I'm not sure about buying calls, but I'm long on the stock. The current dip is a buying opportunity.

2007 Oct 18 11:28 AM

[M:]

i remember very well, the day I read this article. I felt it was a smart strategy. Now looking back, I agree it indeed was a smart thing to do.

2007 Nov 18 02:33 AM