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Alternative energy peers Trina Solar (TSL) and LDK Solar (LDK) announce financial results Wednesday morning. Analysts at First Call expect $1.19 per share from Trina. That’s well-above last year’s $0.29 and amounts to triple-digit growth that would likely have most salivating. Similarly, LDK is expected to earn $0.71 and deliver a very respectable near double over last year’s $0.37 per share.

What does the future hold, though? With energy prices having fallen off the proverbial cliff, some incentive from a business standpoint has certainly dwindled. Further, ailing economies, a weak deal-making environment and past government subsidies no longer a gimme for those companies and their respective bottom-lines—have many wondering whether the group has seen its best days.

In keeping with the uncertainty surrounding the group, both TSL and LDK saw traders refrain from getting too caught up in vacuum, umm value bets. The fact is both companies look very attractively priced i.e. “cheap” on paper. However, each company could easily find the “E” at risk and “PEGging” bulls in the proverbial “You know what” as the potential for lower revisions and project cancellations likely outweighs the more “Obamaistic” case.

Most active in Trina Solar, the November 7.5 put traded nearly 2,000 contracts versus open interest of about 1,000. With shares at 7.22, the ever-slight in-the-money option trades like an ATM with a -50 delta. The bet is likely to flip those deltas very quickly towards either zero or -99. That expectation of course is due to only three sessions remaining until expiration, an anticipated post-earnings implied volatility contraction and a highly probable price gap away from the strike.

A closing mid market price of $1.00 per contract means traders purchasing the contract on an outright basis will need shares of TSL below 6.50 by Friday’s close in order to profit. In the interim, the profit breakeven won’t be much better due to fore-mentioned factors impacting the price of the option.

For traders going a more neutral route directionally, the November 7.5 straddle at 1.60 results in breakevens of 5.90 or 9.10 needed if the spread is held until expiration. In the event of trader apathy and a technical non-mover earnings release, that limited risk strategy would likely find its price tag halved and offered on implieds primed for an ensuing volatility crush to occur.

 

Figure 1: Trina Solar (TSL) 30 – 60 Day IV

A near equal and heavy load of 1,700 plus December 10 calls and puts also traded. Scanning the prints and it doesn’t appear to be the work of a single spread. With decent short interest in excess of four days to cover and the puts bid relative to the calls—traders may have been putting on conversions in bits and pieces.

On the other hand, with implieds in December spiking and bid through historic highs set last month to an average near 200%, the overall action hints of net buyers and a bearish delta straddle. The pricey premium is also bid to levels reminiscent of the adage “Sell 100 and Buy 200!” as volatility traders anticipate more hard hitting action to come.

And finally, on the more optimistic hand, bulls could point at the December call and put activity as being separate but related in its intentions. It’s possible the initiating parties in both the calls and puts were net buyers. If the call buyers opted not to hedge while the put activity established the synthetic call—it would seem more than a few bulls have yet to cave to bearish innuendos holding the market hostage.     

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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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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