The Portfolio for Responsible Investments under Student Management (PRISM) club recently accomplished something no other club has done. The club recently wrote and sold two covered calls on Solar City (SCTY), expiring Jan. 18, 2014. PRISM currently holds 225 shares of Solar City, which was pitched by alumnus Joseph Muoio of the class of 2013 last year. The club paid only $17.75 per share.
As of Monday, Solar City closed trading at $53.68. Although this option is slightly “in the money,” or seeing gains past the exercise price, these gains are not high enough for the investor to exercise the option. The club has seen a massive 203 percent return on their investment which led group leaders to make the decision to write the call.
PRISM club members wrote two calls at an exercise price of $50 with call proceeds at $6. The club capitalized these proceeds for $1,185 and is currently holding the shares because the call has not been exercised. Options are a very interesting financial instrument to use.
The club is a learning experience for students, so members wanted to see if they could maximize this gain. A covered call is an options strategy in which the investor holds long positions in the underlying asset while simultaneously that investor write five (sells) the call option on the same asset. Investors do this in the hopes of seeing an increase in return on the asset and who may be a little bearish in the short term about this asset.
Some people asked if this is making a ceiling for the club gains on Solar City. The short answer is yes, but the main goal it looked to obtain from writing this call is the fact that it already can lock in gains of 203 percent. By writing the call, PRISM collects the premium paid on the option, plus it can sell the option at $50 a share to the investor of the call option. If the investor does not exercise the option, the club can take the premium and still have the shares. PRISM can then sell another two covered calls and collect more premiums. This hedges the downside risk while placing a ceiling on the overall gain of the position.
Solar City’s performance over the last year has been quite the story on Wall Street. Year to Date (YTD), the company has increased 343 percent. The reason the club wants to limit its exposure to the company is because of Solar City’s most recent earnings. The company hit on its expectations, but gave weak quarter four guidance. This sent the company plummeting down $10 per share of 20 percent. At this point, PRISM, would like to lock in gains and seek new investment opportunities in other ventures. Solar City was an exciting play for the club and will always be remembered as a “home run,” but as the saying on the street goes, “bulls make money, bears make money and pigs get slaughtered.” PRISM will continue to be the bull/bear.
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