Option Watch: July 1—From Sizzle to Fizzle?
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July 1, 2008
For Spanish futbol fans and their supporters, this past week has been magical. The Euro 2008 reached its conclusion and after more than forty years that team came out on top. Ironically enough and at the same time, well sort of, for fans of solar power, a price booting downfield has also materialized and in large part, courtesy of Spain. “Ole!”
Last Friday a research note out of Lehman said the country was weighing large cuts to its existing solar subsidy program. Most of the attached companies didn’t fare too well that day. Relative laggardship in related names like Suntech (STP), Canadian Solar (CSIQ), SunPower (SPWR) and Yingli Green (YGE) bared the wrath of apparently having too many eggs in one basket. If that weren’t enough though, Tuesday’s action also showed other problems that lurk beneath the surface for many of those recently hot momentum names.
In Tuesday’s session, the sizzle-turned-fizzle only got worse as a Spanish newspaper put the government’s potential subsidy cut as being up to 35% for photovoltaic installations. That wasn’t the only story though. Some investigative digging on my part showed that Goldman issued a research note which singled out Trina Solar (TSL) for “weak working capital management.”
According to the folks at the Motley Fool, “the same could be said for many competitors” as it relates to their behind the scenes numbers and continued need for funding through the capital markets. And as evidenced by today’s bearish reaction, the vote seems to be that in a shaky market environment, that type of potential hurdle is cause for alarm.
Figure 1: SunPower (SPWR) Daily Chart
One stock that appears to have ties to both problems is SunPower (SPWR). Above is a daily view of what’s been happening ever-closer to the bottom of the lower right hand corner of our trading platforms. In this instance, I’ll call the bearish but slightly oversold action a breakdown from a triangular or bearish wedging pattern.
Our friend PS Elliott has been attempting to cast both its daily and weekly vote for SPWR to see higher prices. Maybe someday, but more immediate the stock does seem poised for a much closer-to-the action retest of its 2008 lows of 53.18.
Checking the board for unusual activity and SunPower, like many and most in the space, did see increased option activity. On the session more than 14,000 contracts versus its 6,000 average changed hands. Of that total, bearish interest did pick up as evidenced by its put / call ratio. A 0.76 average saw a boost to 1.00 as an equal and above-normal count was established. Most active amongst the bearish-minded bets were the July ATM 65 puts. Nearly 900 traded with a closing price of 3.40 on implieds of 74%.
Figure 2: SunPower (SPWR) IV Chart
Looking above, some of that enthusiasm might be appreciated. The chart shows a potential floor in implieds. However, for buyers of the fore-mentioned put, recent historical volatility is at a discount to the premiums, which makes the purchase relatively rich. Additionally, the theta rich option has the added ‘non bonus’ of a looming holiday to contend with. In conjunction with a slightly oversold situation, I’d be fully hesitant at buying those options without an offsetting hedge, as the only fizzle we want, needs to stay on the stock chart.
Chris Tyler
Staff Writer & Options Strategist
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