Options Update: Is the Outlook Sunny for a JA Solar Strangle?
Okay gang, this is the final time I will be filling in for Joe this week, not only because he returns on Monday, but because it is Friday … and I’m not writing any more Options Update articles after this one (at least not today).
I wasn’t expecting to see too many solar stocks on today’s list of potential candidates, I thought we’d have the same situation as yesterday – financials dominating the landscape as the House debates the merits of the $700-billion bailout plan.
That said, I found it rather interesting that JA Solar
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PowerRating) popped up on our list. Let’s take a look at the overall activity for JASO.
Looking at our Intraday Volume Explosion List, JASO immediately caught my attention. JASO normally sees total daily call activity of 1,127. This activity has ramped up nearly 3 times today, with 5,623 total contracts crossing the tape. The bulk of this activity (in fact, 5,500 contracts of it) crossed on the October 12.50 contract (QJP JV). This wasn’t what caught my attention; it was the corresponding put activity on JASO’s October 10 put (QJP VB). This contract saw 5,138 total contracts – immediately causing me to think of a strangle strategy.
Why a Strangle?
Let’s start by defining a strangle strategy. According to our glossary, a strangle is “the purchase or sale of an equivalent number of puts and calls on a given underlying stock with the same expiration date but different strike prices. The strangle purchaser seeks to profit from relatively large movements in the price of the underlying stock, regardless of direction.”
We have 1 underlying stock (JASO) and puts and calls with the same expiration date, but different strike prices, 2 of the 3 criteria to meet for a strangle. The third criterion is an equivalent number of the puts and calls. Granted, the total activity on the put and the call differ, but there were numerous blocks of transactions consisting of the same number of contracts. The largest of these blocks was the one crossing at 10:36 AM EST, when 473 QJP VB and QJP JV crossed the tape with prices of 58 cents and 78 cents, respectively. That sure looks like an equivalent number of puts and calls taken out on the same stock on different strike prices. Ladies and gents, we have met all 3 criteria for a strangle.
With JASO trading at (roughly) $11, the hypothetical option player wants the stock to move past $13.28 or $9.42 (the strike prices plus/less the respective execution prices) to break even … what are the chances? Let’s see …
A Setting Stock
There’s your unnecessary sun pun there, ladies and gents. However, it aptly describes the technical picture for JASO. The stock has dropped consistently since April 2008 (when it hit its year-to-date high of 27 – nearly matched in May), losing 56.7% on a year-to-date basis. The stock is currently positioned in the 11 region, facing resistance in the 12 region. The 12.50 level is the site of peak call open interest in the October series, making this a site of potential options-related resistance for JASO.
In addition to the potential options-related resistance at 12.50, the stock will have to topple its 10- and 20-day moving averages in order to fight its way higher. Both of these trendlines are positioned below 12.50, and both have done a rather effective job of limiting the stock’s gains. In fact, the stock hasn’t strayed too far away from these trendlines on the high or low side throughout 2008. Even if the shares break through the twin trendlines, we could see the stock drop as the moving averages fall.
So, the road higher is fraught with resistance; what about any potential support? The only true potential support I see for JASO is the 10 level, and that has held pretty well during the past week. This level could receive a bit of strength from options-related support, as the 10 level is the site of heavy put accumulation for JASO. However, this is bad news for our hypothetical option player, as he/she needs the stock to drop to $9.42.
Sunny Sentiment
With the stock facing all kinds of trouble on the road higher, I would have expected to find quite a bit more pessimism. In fact, let’s just say that analysts believe JASO’s future is so bright, that they need to wear shades (sorry, I just can’t pass up the low-hanging, Timbuk-3 references). According to Zacks, JASO receives 10 “strong buys,” 1 “buy,” 1 “hold,” and 1 “sell.” This configuration leaves little chance for momentum-lending upgrades, leaving the door wide open for downgrades – which could push the stock lower.
The Verdict?
The 1 thing our hypothetical option player doesn’t want is JASO to enter into a trading range. That said, this may be exactly what is happening, with the 10 and 12.50 regions acting as the upper and lower rails. With this in mind, it certainly seems that the road lower may be easiest for the shares. Will JASO fall below $9.42 by October 17? We shall see.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.