May 28, 2009 ndash; On April 9, when A-Power (Nasdaq:APWR) was trading at $5.80, we raised our price target on the stock to a $9.70 to $12.50 range based on an assumed 1.5xFY09 guidance an revenues and 15x FY09 guidance on income. This morning the stock is trading at about $12.25, at the high end of our target range.

We remain bullish on the companyrsquo;s prospects across the distributed power and wind energy markets in China and throughout the Asian region. However, the stock is up 111%, and we arenrsquo;t yet prepared to increase our expectations for the companyrsquo;s FY09 revenues/income that would rationalize a corresponding increase in our price targets. That being said, our bullishness on the companyrsquo;s performance and prospects is such that we arenrsquo;t prepared to take profits either. This is a story with a long-term growth thesis, in our opinion.

So our suggestion at this point, is to hedge against downside risk through writing out-of-the-money covered calls. In particular, we like the September 17.50 calls which can be sold this morning for $1.10. This would lower the stock price basis, if you bought it on April 9, to $4.70. If the stock moves higher nbsp;and by September 19, you get called out at $17.50, your return would be 272%. If the stock pulls back, the lower cost average makes the move more palatable, while the option premium may decline enough to justify closing it out (buying back the September 17.50 call for say, $0.20, locking in a gain of $0.90, thereby resulting in an adjusted cost basis of $4.90) where you can written another one and bring in further premium by writing another call into strength at some future date.

Using derivatives is an excellent way to hedge long-positions in a choppy market. We have been selling-out-of-the-money covered calls, and buying puts into strength (at the higher end of stock and indices trading ranges), and selling puts into weakness (at the lower end of stock and indices trading ranges).nbsp;

nbsp;Key Disclosures: SCPEditor is LONG APWR. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.

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