8/2/08

ESLR Continued

If you're following along with my Evergreen Solar (ESLR) purchase (previous posts here, here, and here), I might have made a few blunders this week.

On Monday morning, I bought double my original purchase for $8.77 a share, bringing down my cost basis to $9.34 a share, commissions included. First blunder (considering I could have bought shares at a cheaper price had I just followed my original plan!)?

On Wednesday, I sold three covered calls (January 10, strike 5) for 6.40 each. Second blunder?

The calls last traded at 5.50. If they stay at that price on Monday and ESLR stays at 9.13, if I close my entire position, I'll make a profit of around 7.4% less commissions. I probably won't do it. A potential blunder?

I had a chance, on Thursday, to buy back the calls at 5 and sell ESLR for around 9.30. That would be a gain of around 14.6% minus commissions. Did I sell? Nope. Third blunder?

Here's what will happen if I don't do anything else until the calls expire or are assigned.

The most I can lose is 2.94 a share (9.34 - 6.4). That's if ESLR goes to zero.

The most I can gain if the calls are exercised is 2.06 a share (6.4 [what I've been paid already] + 5 [what I'll get for my shares if they're assigned] - 9.34 [cost basis]). That'll be a 22% gain. Not bad for a year and a half, but not great by any stretch. If ESLR goes to 18, I might get a little upset.

Whoever bought the calls will break even if/when Evergreen goes to 11.40. He or she will make a profit if ESLR goes higher than that.

If the calls aren't assigned, I'll get to keep the shares and the 6.40 premium. My gains/losses at that point will depend on ESLR's share price. If I sell calls again, my profit will be the extent to which they sell higher than 2.94. If I decide to sell my shares instead, my profit will be the extent to which ESLR trades above 2.94, as that would be my new cost basis.

We'll see what happens. In the meantime, I have the proceeds of the calls to put to work. Do I keep them so I can close my position, or do I invest them elsewhere?

Lessons learned (hopefully):

1. I suck at trading. Better to find good stocks and keep them until they stop being good stocks.

2. Stick with the plan! Don't go off and do things because they seem good at the time or are exciting. Don't stray from the plan because of fear. Only change the plan when new developments arise that make invalid previous assumptions on which the plan is based.

3. Stay away from selling LEAPs, unless there's a really good reason. Capital gets tied up for too long.