Options Update: Evergreen Solar Attracting Call Option Buyers
The once mighty shares of Evergreen Solar
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ESLR |
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PowerRating) have been brought low this year. The stock was one of the hottest solar stocks on Wall Street in 2007, rallying a hefty 128% for the year. This year, not so much. ESLR has fallen more than 46% since January, but that hasn’t stopped options traders from calling for a return to 2007’s performance levels – despite the bearish grumblings of short sellers and Wall Street analysts.
But ESLR option bulls continue undeterred, with heavy call volume placing the shares on our Intraday Volume Explosion List once again in today’s trading. Specifically, more than 11,600 calls have crossed the tape, arriving at more than 8 times ELSR’s average daily call volume. As I perused the trading activity, I notices that considerable attention was being paid to the stock’s September 10 call. It was this out-of-the-money call volume that caught my eye today.
Call Buying on Evergreen Solar
Jumping into the activity, more than 8,000 calls have changed hands at ESLR’s September 10 strike this afternoon. Nearly all of the volume was concentrated into small blocks of 100 to 300 contracts, indicating activity from smaller investors and not institutions. The other takeaway from this call activity was the fact that nearly all of today’s volume traded at the ask price, suggesting a wealth of call buying. However, with open interest of 22,604 contracts at the September 10 call, I can’t be certain that today’s activity is of the “buy to open” variety.
For the sake of argument, let’s assume that we are looking at call buying activity, using the block of 216 contracts highlighted above as an example. The trade breaks down like this: the hypothetical trader purchased 216 September 10 ESLR calls for $0.35, or a total outlay $7,560 — ($0.35 * 100)*216 = $7,560. For this trade to reach breakeven, ESLR would need to rally roughly 10% to $10.35 per share. We arrive at this by adding the cost of the option ($0.35) to the strike of the purchased 10 call ($0.35 + $10 = $10.35).
While a 10% move is not impossible for ESLR – the shares are prone to the same volatility that plagues the solar sector as a whole – the fact that the shares didn’t rally with the rest of the sector during past several weeks raises a few concerns. Let’s see if the stock’s technical picture or sentiment backdrop provide any clues on the potential for additional profit from this position…
Technically Speaking
On the technical front, a bullish position on ESLR looks quite uninspiring. The shares have narrowed their once broad trading range, pulling the ceiling down from the 12.50 region to the 10 area. Support sill resides in the 8-8.50 region, but a tighter trading range does not benefit options traders who rely on volatility for sizable returns. Furthermore, ESLR is trading back below resistance at its declining 20-week and 32-week moving averages. The former trendline capped the shares in January and mid-April, and could now provide another technical hurdle to any advance from the shares.
The Sentiment Drivers
As mentioned above, options traders have a clear preference for calls over puts. In fact, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.34 indicates that calls nearly triple puts among options with less than 3 months until expiration. What’s more, this ratio ranks just 2 percentage points shy of an annual peak, indicating that speculative investors have rarely been more bullish toward ESLR.
Reinforcing this heavily optimistic outlook from options traders is the stock’s open interest configuration. Peak near-term call open interest resides at the 10 strike, with more than 24,000 contacts. Comparatively, peak put open interest for the same period totals just 8,000 contracts at the 10 strike. With heavy accumulations of overhead call and put open interest, it seems that traders are not expecting ESLR to fall much further, a configuration that has negative implications from a contrarian perspective.
Elsewhere on Wall Street, short sellers and analysts are heavily pessimistic toward ESLR. More than 19% of the stock’s float is sold short, and Zacks.com reports that 9 analysts rate the stock a “buy,” while the other 9 have issued “hold” or worse ratings. Given ESLR’s year-to-date decline of 46%, I would argue that this negativity is par for the course. As such, short sellers would be less likely to buy back their winning positions. Additionally, short interest rose by nearly 2% during the most recent reporting period – a trend that could mean additional selling pressure for ESLR.
The Verdict?
If you couldn’t tell from the indicators and technical analysis above, I’m not all that jazzed about buying calls on ESLR right now. The equity remains locked in a sideways trending channel that appears to have narrowed lately. Furthermore, excessive optimism from options traders and the potential for renewed short selling are both potential short-term risks for the security. Selling a September 10 call would make more sense to me at the moment, or even buying a longer-dated, in-the-money put. I think we could see ESLR fall to support in the 8.50 region before the shares begin a serious trek higher.
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