Tuesday, January 19, 2010

Options Update: Trader Expects Extended Slide for First Solar, Inc. (FSLR)

The stock is trading down seven cents at $124.00 in early pre-market. The stock actually showed some relative strength on Friday, closing down about half the percentage decline of the Nasdaq.
If I had to guess, I'd say the November 12 lows, $115.09 intraday and $115.37 closing are the immediate downside risk although as you'll see in the story someone is thinking lower.
From Schaeffer's Research (Friday, Jan. 15):

Will FSLR rebound off a familiar foothold?

The shares of First Solar, Inc. (FSLR: View sentiment for FSLRsentiment, chart, options) have had a rough week, surrendering about 10% since flirting with the $140 level on Monday. In fact, digging into today's option activity reveals that at least one option trader is betting on a continued slump over the intermediate term by employing a bear put spread on the stock.

Earlier this afternoon, a block of 200 March 80 puts – marked "spread" – crossed the tape for $1.55, which was closer to the bid price at the time, implying they were likely sold. At the same time, an equal amount of March 115 puts – also tagged "spread" – changed hands for the ask price of $8, indicating they were likely bought.

Since the premium paid for the 115-strike puts exceeds the premium received from selling the deeper-out-of-the-money puts, the spread was established for a net debit of $6.45 ($8 - $1.55).

In order for the strategist to reap a profit, the shares of FSLR need to breach the $108.55 level (bought put strike – net debit) by March options expiration. However, even if the shares defy the trader's predictions and power higher in the intermediate term, the maximum potential risk on the play is capped at the net debit incurred at initiation.

The best-case scenario for the bear put spread is for the shares of FSLR to finish just beneath the round-number $80 level before March-dated options expire. In this instance, all of the puts will finish in the money, but the intrinsic value of the long 115-strike puts will offset the cost to buy back the written 80-strike puts, resulting in a net profit....MORE