Options Update: Solarfun Power Call Traders Positioning Ahead of Earnings
Shares of Solarfun Power
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SOLF |
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PowerRating) have surged more than 21% this morning, as traders have turned their focus to alternative-energy stocks ahead of a slew of key earnings reports from the sector.
For its part, SOLF should release its third-quarter earnings figures later this month. Currently, Wall Street is looking for a profit of 16 cents per share from the solar-cell specialist – a penny worse than the same quarter last year. However, SOLF has performed admirably in the earnings confessional, topping expectations in 3 of the past 4 reporting periods by an average of 124%.
Those investors looking to mark their calendars for the event are currently out in the cold, as SOLF has yet to officially set the date. However, options speculators aren’t about to let this small hurdle stand in the way of pre-event positioning. Specifically, more than 6,000 SOLF calls have crossed the tape, outpacing the stock’s average daily call volume by a factor of 7 and placing the shares on today’s Intraday Volume Explosion List. However, it was the heavy activity at the November 7.50 call that caught my eye this afternoon.
The Anatomy of a Solarfun Power Call Position
The first thing I noticed about today’s SOLF volume was the plethora of small bocks ranging from 5-30 contracts. In fact, there hasn’t been a block of contracts larger than 30 so far today. This activity tells me that we are looking at an influx of individual investors, instead of institutional activity. I also noticed a smattering of contracts trading at the bid price. These contracts most likely represent profit-taking from existing positions, especially considering SOLF’s 21% rally so far today.
For today’s example, however, I’m focusing on the most recent block of 30 SOLF November 7.50 call contracts. This trade was executed at 12:18 p.m. Eastern time, and crossed at the ask price of $2.60. The total outlay for this position would be $7,800 — ($2.60 * 100)*30 = $7,800. For this trade to reach breakeven, SOLF would need to rally about 65% from Friday’s close of $6.10 per share before the options expire on November 21. The maximum loss on this position is limited to the initial investment of $7,800.
By entering this trade, the investor is indicating that he expects SOLF to rally sharply during the next week. The shares have a good head start, with today’s jump of more than 21%, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
The technical picture for SOLF offers some pretty convincing drivers for a November 7.50 call heading into the company’s earnings report. Prior to SOLF’s second-quarter report, the equity rallied from a near-term low of 11.53 on August 11 to a peak of 21.26 just 3 days ahead of the August 27 event. A similar rally heading into the third-quarter report could place SOLF upwards of $9.50 or $10 per share, potentially netting quite a profit for bullish options traders.
However, the shares must first overcome a series of technical hurdles. SOLF has overcome resistance at its declining 10-day and 20-day moving average, but the stock is still battling resistance in the 7.50-8 region. This area has held the equity in check since October 7. The next hurdle for the November 7.50 call trading example is the 10 level. Remember that SOLF has to rally to about $10.10 per share, and the 10 level has been quite a technical sticking point in the past for the equity. What’s more, the stock’s 10-week moving average has descended into the 10 region, and could provide additional resistance to any rally attempts.
The Sentiment Drivers
Those technical hurdles could be easily overcome if we see a shift in investor sentiment prior to the company’s earnings report. Currently, SOLF’s Schaeffer’s put/call open interest ratio (SOIR) of 0.71 ranks above 85% of all those taken during the past year, indicating a wealth of negativity from the speculative options crowd. Meanwhile, 12.5% of the stock’s float is sold short, and Zacks.com reports that all 6 analysts following the shares rate them a “hold” or worse. We are already finding a bit of capitulation from options players (given today’s heavy call volume) and short sellers (short interest declined by 16% during the most recent reporting period). Should this trend continue through the next couple of weeks, it could help send SOLF soaring sharply higher.
The Verdict?
Given the stock’s performance heading into the company’s prior earnings report, now may be the right time to jump into a November call position on SOLF. Keep in mind, however, that a December call option, while offering more time premium, may do more harm than good. The shares sold off sharply following last quarter’s announcement, as bullish investors sold their positions following the news. We could see a similar development this time around, especially if the stock continues its advance amid a groundswell of rising investor optimism.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.