SOL - Elevated Vol in Chinese Solar Company

Discussion in 'Options' started by livevol_ophir, Nov 17, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    SOL is trading $9.25, down 5.8% with IV30™ up another 5.7%. The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

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    <a href=""><img height="200" src="" /></a>

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    SOL is a manufacturer of solar wafers and producer of solar power products based in China.

    I found this stock using a real-time custom scan. This one hunts for high vols.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $7 and &lt;= $70
    IV30™ - HV20™ &gt;= 10
    HV180™ - IV30™ &lt;= -8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;=10 and &lt;=60

    The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

    The Charts Tab is included (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    <img src="" width="600" />

    We can see:
    IV30™: ~81.68
    HV20™: 63.89
    HV180™: 71.07

    So, IV30™ is elevated relative to the short term and long term realized movement of the stock. An added bonus can be seen in the Skew Tab <a href="">in the article</a>.

    What's the hotness here is that the ATM strike is elevated (per chart above) and is elevated per the surrounding strikes. The Dec 9 line is priced at ~83 vol. On the other hand, the Dec 7.5 puts are priced at ~75 vol and the Dec 10 calls are priced at ~81 vol.

    Let's look to the Options Tab (<a href="">in the article</a>).

    <b>Possible Trades to Analyze</b>
    1. Vol is elevated, though the stock looks like the stock might decide to go back down to $3. That's one ugly stock chart...
    Sell the Dec 9 straddle @ $1.75 or ~ 82 vol.

    2. Do #1, but cover with a Dec 7.5/10 strangle for $0.80, or a total $0.95 credit. This sells the elevated vol and buys the "cheaper" wings (see skew chart). It sells 82 vol and purchases ~78 vol. The risk is to the downside, as the upside has a max loss of $0.05. I've included a PnL chart of this strategy <a href="">in the article</a>.

    3. Do #1, and buy just one side to cover (i.e. buy a call or put but leave the other side naked).

    NB: This is a Chinee solar stock, so ya know, there's some risk to being naked short options here.&nbsp; The 52 wk. range for this stock is [$3.65, $15.34].&nbsp; That's pretty wide.

    This is trade analysis, not a recommendation.

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