Sponsored By:

Supertex (SUPX)

January 06, 2009

Dear Fellow Options Trader,

Supertex (SUPX) is a semiconductor company that supplies components for high-voltage applications primarily used in the medical electronics, imaging, illumination and telecom networking segments. Something very interesting is happening with its options and we want to get involved.

On Dec. 23, Microchip (MCHP) filed a Schedule 13D with the SEC indicating it has an ownership position in SUPX of 5.4%. What is interesting is how MCHP came about this ownership and how it may come about owning another chunk.

MCHP acquired 594,300 shares of SUPX in open market transactions prior to last May and over the past six months has sold some puts.

The December puts that expired in-the-money and were assigned to MCHP (103,100 shares) pushed the company to a greater than 5% position in SUPX and resulted in the subsequent filing.

In its disclosure, MCHP revealed other put option transactions in SUPX:

• 400 SUPX Jan 22.40 Puts
• 4,500 SUPX March 25 Puts
• 300 Jan (2010) 22.50 Puts
• 3,500 Jan (2010) 25 Puts

If all of these options were assigned to MCHP, the company ownership would add 870,000 shares to its current 697,400 and take its ownership position just above 12%.

While MCHP said it may acquire more shares depending on market conditions and also reserves the right to dispose of them at any time, MCHP also said it has no current intention to do so or to take any action with respect to a transaction.

SUPX stock is currently at $23. On an initial screen, the company has $3.41 per share in cash and no debt. Digging deeper, the cash position is actually $10.40 per share when its Auction Rate Securities are added.

SUPX lowered guidance for its December quarterly earnings on Dec. 18. December options expiry was Dec.19. MCHP filed on Dec. 23.

We recommend following MCHP's move and sell to open the SUPX March 25 Puts (SQOOE). The option is currently bid at $3 -- let's use a limit of $2.75. Remember that selling puts is a bullish move and, as long as SUPX stock trades above $22 on March 20 (the day March options expire), the trade is profitable.

We think the risk/reward picture is very good -- having MCHP in the wings as a potential suitor should protect SUPX's downside, along with the cash. However, Remember, when selling puts, only sell an amount that you are comfortable owning if the stock is put to you.

For example, should SUPX stock be "put" to us upon expiration, if you would only want to own 500 shares, then only sell five contracts of the SUPX March 25 Puts, as each contract represents 100 shares of the stock.

Have a great day trading.


Nick Atkeson and Andrew Houghton
Editors
Options Trader