Options Update: Solarfun Power Holdings Rises Following Equity Offering
Solarfun Power Holdings Bucks the Sector Downtrend
While most other solar stocks are trading deeply in negative territory today, shares of Solarfun Power Holdings
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PowerRating) are soaring during midday activity. Scanning the headlines and news feeds, I found very little in the way of a catalyst for today’s move. The stock could be higher due to a poorly received earnings report from rival Canadian Solar
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PowerRating), or the shares could be benefiting from the company’s closure of an equity offering with net proceeds of $71.9 million. However, both of these news items seem highly unlikely as bullish drivers, given that the solar sector usually rises and falls on the success/failure of its members, and that equity offerings are notorious for diluting shareholder value.
Nevertheless, SOLF is bucking the trend in the sector today, rising nearly 6% compared to the Claymore/MAC Global Solar Energy Index exchange-traded fund’s (ETF) meager gains of 0.38%. What’s more, this technical strength has bearish options players nervous with August expiration scheduled for tomorrow, as put volume has more than doubled its daily average. This swarm of more than 5,300 put contracts placed SOLF on our Intraday Volume Explosion List, and is the subject that caught my eye today.
Bears Ditch August Options Ahead of Expiration
Digging into today’s heavy put volume, I found that the most active option was the August 15 call (QFG TC). This front-month strike has seen volume of nearly 2,000 options change hands on open interest of 6,216 contracts. Examining the trading activity closer, I uncovered that nearly all of today’s volume changed hands in small blocks totaling roughly 20 contracts or less. Furthermore, nearly all of these trades traded at the bid price. From this data, we can safely speculate that today’s activity is most likely the closing of existing August positions ahead of tomorrow’s expiration. Normally, you would see heavier closeout volume on the Friday of expiration, but with SOLF surging today, some of the weaker hands are jumping ship to limit losses (a theory supported by the lack of any block trades in the 200-contracts-and-above range).
Keeping with our options theme, the stock’s Schaeffer’s put/call open interest ratio (SOIR) indicates that a hefty degree of optimism is levied against the shares. This ratio currently rests at 0.44, meaning that calls more than double puts among options with less than 3 months until expiration. Additionally, SOLF’s SOIR ranks below 79% of all those taken during the past year, hinting that options speculators have been more optimistic toward the shares just 21% of the time in the prior 52 weeks.
With August options expiring at the close of trading tomorrow, let’s look at the stock’s September open interest configuration for a better gauge of what traders are expecting from SOLF. Per the graph below, peak call open interest rests at the September 15 strike, totaling more than 6,000 contracts. Other notable call strikes for the series include the 17.50 call, with open interest of about 4,000 contracts, the 30 call and the 50 call.
However, I should point out that contracts on the 30 and 50 calls has been open for some time, and may not be an accurate representation of current expectations. For this purpose, keep an eye on the 15 and 17.50 levels, and the lack of put open interest below the 15 level. These last 2 points indicate that investors may not be looking for any weakness in the shares over the short-term, which could have negative implications from a contrarian standpoint.
Technically Speaking
Turning our attention to the stock’s technical performance, we find that SOLF has reclaimed its 10-day and 20-day moving averages in the past 2 trading sessions. These trendlines had pushed the stock steadily lower since mid-June, and the upside move could be a signal of continued positive price action over the short-term.
However, a weekly chart of SOLF is not quite as forgiving. The stock is staring up at resistance from its 10-week and 20-week moving averages. The former of these intermediate-term trendlines is closing in on the 15 level, which has long been a thorn in SOLF’s side. What’s more, the security’s year-to-date decline of 58% becomes much more apparent from a broader view, raising concerns about the heavy optimism from options traders.
The Verdict?
Today’s nearly 6% surge despite broader weakness in the solar sector is impressive for SOLF, and indicates that short-term price action remains strong. However, the real test of this optimism from both traders and options speculators will be overhead technical resistance at the 15 level. With crude prices declining sharply in recent weeks, the future of solar companies has been called into question. There is certainly a market for alternative sources of energy, but the ravenous demand that could spur lofty valuations for SOLF shares may be dwindling with the price of crude. As far as SOLF stock is concerned, the equity must prove that it has the buying pressure to overcome long-term resistance at the 15 level before I would consider a long position.
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