February Fun With LDK Solar

We’re revisiting an old favorite today, LDK Solar Co. Ltd (NYSE:LDK).  This is a Chinese Green Energy play that we like to throw on occasionally.  As much as we love green energy it isn’t something you can put your money into and forget it.  Last month the solar sector was among the bottom on Tickerspy.  This is one area where you need entry and exit strategies.

We’re seeing some positive technical signs:

  • Higher highs and higher lows have been happening for four days.
  • Person’s Proprietary System (PPS) is showing a buy
  • PPS shows a positive cross over after the buy signal
  • MACD Histogram progresses back to and above zero
  • Stochastics have crossed over into positive and have not gone negative
  • Stock did not break down below pivot point of $6.93

Our short term strategy was to do a covered call.  In simple terms you buy some stock and then sell a contract to sell the stock to someone else at a later date.  We managed to get in at $6.94 per share and sold a March 7.5 CALL for $.40.  We get paid $.40 per share for agreeing to sell the stock to someone else if it reaches $7.50 by March 19.  If the stock keeps going up we miss out because we will have to sell it at $7.50.

There’s a 63% chance that it will not get to $7.50 so we can put on another covered call next month if things go our way.

If it stays under $7.50 we get to keep the $.40 which reduces our risk to $6.54 per share.  We won’t lose any money unless the stock drops below $6.54.  There appears to be some resistance around $7.12, but if that breaks it should be a relatively smooth ride up to $7.50.  We have a Sell Stop in place at 6.74 which still nets us $.20 per share if the trade moves against us.

Without the covered call this trade might not be worth the risk.  Using covered calls can be a good strategy to reduce your risk if you know that you want out of a stock by a certain date or price.

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