Trina Solar Limited (TSL) Investor Guards Against a Pullback with a Collar

Simultaneously selling calls and buying puts to protect a long stock position on TSL

Trina Solar Limited (TSL) has been the center of some accelerated activity on both sides of the options aisle today, with intraday volume soaring to abnormally lofty levels. More specifically, the China-based solar concern has seen about 8,900 calls change hands – more than six times its expected daily volume. In addition, the security has seen close to 10,000 puts traded – more than 11 times the norm.

However, digging deeper indicates that a healthy portion of today's activity may be related in the form of a collar on the stock. In other words, it appears one TSL shareholder may be trying to guard his long position against a potential pullback in the near term.

To implement a collar, the investor will already own at least 100 shares of TSL – meaning he's a shareholder first and an option trader second. In other words, he's still relatively bullish toward the stock, but is nervous about its short-term trajectory.

To lock in a comfortable price to unload his position, if need be, the shareholder can initiate the collar by simultaneously buying a protective put and writing a covered call. This double dose of options acts as a cheaper form of "portfolio insurance," compared to simply buying a lone put – but not without a price.

That said, let's dive into TSL's option activity... In late-morning trading, a block of 8,000 out-of-the-money March 20.50 puts – marked "spread" – traded for the ask price of $0.55, suggesting they were bought. At the same time, an equal amount of out-of-the-money March 24.50 calls – also marked "spread" – changed hands for the bid price of $0.35, implying they were likely sold. Assuming this transaction was, in fact, a collar, the shareholder's "insurance" was purchased for only $0.20 per pair of contracts ($0.55 - $0.35). Sure, the investor could have protected his long stock position by just buying the March 20.50 puts, but at a much steeper price of $0.55 per contract.

Nevertheless, by purchasing the March 20.50 put, the trader is guaranteeing that the least he'll receive for his TSL stake is $20.50 per share, should the equity fall beneath this strike before options expiration on Friday, March 19. However, though the addition of the covered March 24.50 call reduced his initial net debit on the play, it could come back to haunt him in the long run.

Should TSL soar past the $24.50 level by front-month expiration, the investor will be obligated to sell his stake for $24.50 per share – representing a discount to what he'd get on the Street. What's more, the ex-shareholder will have to sit on the sidelines in the wake of an extended rally, missing out on additional portfolio gains.

Technically speaking, the aforementioned collar strategist could be worried about TSL's ongoing battle with its 20-week moving average. Until last week, this trendline – along with its 10-week cohort – had guided the stock higher since mid-March 2009. Now, the security's 20-week moving average could switch roles to act as a technical speed bump for the shares