Daily Delta: First Solar
February 27, 2008
The solar space is in the news again today, which for bulls and bears interested in the sub-sector, is an increasingly common affair. A combination of nominal all-time-highs in Black Gold and a nascent and ever growing technology conspire to keep momentum traders maintaining their interest in the group, and analysts making a barrage of calls almost daily.
In Wednesday’s session, a few names continue to be pressured in hard corrective patterns. More than a few of the difficult losses from late-2007/early-2008 highs are finding potential EW4 lows per the wizardry of ProfitSource. Spearheading the list of decliners, Solarfun (SOLF), a Chinese-based semiconductor manufacturer of mono, multicrystalline and photovoltaic cells is off 85 cents at 13.20 after BofA cut shares to “Sell” from “Neutral” and slashed its target price from $37 to $12. Analysts there expect lower anticipated shipments and a tight silicon market to weigh in on its ability to meet its 185 MW of contracts for FY08.
Separately, one-time and not-so-long ago IBD 100 component stock JA Solar Hldgs (JASO) is also weighing in on the group. BofA cut its rating on the stock from “Buy” to “Neutral” citing rising competition and an expected decline in profit margins. The investment house also took time to cut peers Trina (TSL) and Yingli Green Energy (YGE).
Figure 1: First Solar (FSLR) Daily
One player that continues to rise above the occasion within the space is First Solar (FSLR). Since blasting views by 24 cents with earnings of .77 per share two weeks ago and issuing solid guidance, First Solar has gone on to find fist-pounding support from both accredited analysts, the Fast & Mad Money crews at CNBC and bullish traders.
Technically, the action of the past ten sessions sets up a solid-looking gap consolidation and continuation pattern which is in harmony with ProfitSource and Elliott Wave. The action isn’t likely to draw in traditional growth-stock breakout strategists just yet, as the price contraction is in the lower half of a deep base. The 50% plus drop is typically frowned upon by that cadre of trader. However, steep declines in excess of 30% to 35% are given leeway when the action occurs during a corrective phase in the market. That said, with an existing EW4 buy trigger in place, a firm showing of strength by maintaining its 50-Day EMA and a rising / opening Bollinger Band, FSLR does appear to have a preponderance of bullish evidence in place.
Looking to the options action in Wednesday’s session and trader action is mostly lethargic with volume running about average. Implieds remain valued below the underlying movements of FSLR. That’s been the case since the bullish earnings reaction in the stock and an overnight volatility crush. Looking at the IV / SV relationship and both near-term and longer-dated premiums out more than 90 days are trading at steep discounts to fair value.
On the other hand, options dated 60 to 90 days, or April in this case, appear fairly valued. However, the overall IV / SV analysis is a bit misleading when comparing periods as the implieds aren’t heavily skewed between months. The observation from this corner is the real difference is due to one or two large price gaps over the months, which have caused an aberration that’s not a readily tradable edge. All told, implieds look attractive for long premium strategies. However, and particularly with high-priced and still volatile stocks such as FSLR, spreading the position in the direction of our technical bias can go a long ways towards ensuring a stronger trade.
Chris Tyler
Staff Writer & Options Strategist
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
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