How to Invest in American Superconductor Corporation

American Superconductor Corporation (NASDAQ:AMSC) received a generous upgrade today, coupled with a fat $100M contract.  The upgrade comes from Kaufman Brothers with a $36 target.  Given the stock currently trading near $33.60 (up nearly +11% from yesterday), it is quickly approaching that target.  The following is a strategy that could be used to capture most of that $36 target price, and maintain a strong downside protection to about $30/share.

Based on rates recently checked, buying 100 shares of AMSC for $33.65/share and then selling the $35.00 Jan 2010 Call (QAYAG) contract for $3.70 could net you 16.9% profit if AMSC closes above $35.00/share at the expiration date in 108 days.  Not bad for 4 months of investing and your average monthly gain would be 4.77%.  Additionally, you would have a big downside protection to $29.95, or about a 11% drop in stock price. It is worth noting that it appears strong price support exists for this stock at the $30 level.

The Compound Annual Growth Rate (CAGR) on the assigned option position is 69.5%, which is better than the average overall long term market return of 10%.

Possible Strategy if AMSC drops 11% and closes below $35.00:
If AMSC closes below $35.00 at any time during the trade, you can roll down the position by purchasing back the $35.00 Jan 2010 Call contract and then selling another call at a lower strike (say the $30.00 strike) and/or further date out to make up for any losses caused by having to buy the $35.00 Jan 2010 Call back.  If the stock recovers, you should be able to simply sell out of the position for even money if you don't want it tied up in the positions.

If it continues to drop, you now own the stock for less than $30/share when you were originally interested in buying at $33.65/share, sort of sounds like a decent outcome to me.