Monday, January 10, 2011

LDK Solar (LDK) - Chinese Solar Vol Pops on Guidance

LDK is trading $12.15, up 16.5% with IV30™ up 11.4%. The LIVEVOL® Pro Summary is below.


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There's a great article on The Motely Fool that sums up the news. Here are some highlights:
Solar panel manufacturer LDK Solar started the week off right, jumping 17% today on news of increased guidance.

LDK now expects revenue of $870 million to $910 million in the fourth quarter, higher than the $710 million to $750 million of its previous forecast. In 2011, expectations are now for $3.5 billion to $3.7 billion of revenue, blowing away analyst estimates of $2.74 billion. Shipment, in-house production, and gross margins are all expected to be higher than previously forecast.

The solar sector was beaten down in 2010 as analysts worried about where demand was going to come from. LDK Solar apparently isn't having any problems finding buyers for its panels, pulling the entire sector higher as a result.
Source: LDK Solar Shares Popped: What You Need to Know


The company has traded over 22,600 contracts in three hours on total daily average option volume of just 10,689. Calls have traded over 16,000x for a 2.5:1 ratio to puts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. Jan 11 and 12.5 calls have traded nearly 7,000 in total, though volume is less than OI. The Jan 11 calls look a little bit like two-sided trading, though I feel like it's mostly purchases. The Jan 11 OI looks short. The Jan 12.5 trades today look like purchases on what I believe to be long OI.

The Skew Tab snap (below) illustrates the vols by strike by month.

The Skew is quite normal looking, so the order flow hasn't overwhelmed any single strike or set of strikes.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see an extended period where the stock just kinda did nothing. All of a sudden, it has popped today on the guidance news. It's interesting how the IV30™ didn't really dip with the HV20™. In English: The short-term implied vol didn't go down even as the underlying stayed in a tight stock price range. Now the IV30™ has jumped to the long-term realized movement of the stock (HV180™).

Possible Trades to Analyze
Since the skew hasn't really moved, I feel like the opportunities are bit limited. Let's look at some possibilities.

1. Sell the rising vol in Jan:
Sell the Jan 12.5 straddle @ $1.16
Buy the Jan 11/14 strangle for $0.29
This creates an $0.87 credit with a MaxGain:MaxLoss ratio of 1.31:1. Not too bad. I've included the PnL chart on Jan expo for this trade.

2. Buy the upside:
Buy the Feb 12/13 call spread for $0.43.
This is a neat little bet b/c the MaxGain/MaxLoss is > 1, though it's a call spread the skew is flat, and as of this writing, there's already $0.34 of parity. That's not too bad if you wanna play some deltas on this guy.

3. For you risk lovers:
Sell the Feb 11 puts to fund the Feb 13 calls (i.e. the Feb 11/13 risk reversal). This pays ~0.15 to own the upside while being naked the downside.

This is trade analysis, not a recommendation.

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