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Option Activity Alert: Hopes Run High for Suntech Power

Bullish bets rule Suntech Power's (STP) options pits as the share price slumps

by 2/8/2008 1:14:52 PM
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Option traders have displayed an overwhelming preference for calls on Chinese solar-energy firm Suntech Power (STP: View sentiment for STPsentiment, chart, options) recently. The International Securities Exchange (ISE) reports that investors bought 4,246 calls to open on STP yesterday, compared to just 784 puts that were bought to open on the ISE. The resulting single-day call/put ratio of 5.42 was among the highest such readings on the exchange Thursday.

But yesterday's option activity was no anomaly. During the past 10 trading days on the ISE, investors have bought a total of 14,268 calls to open, along with 2,840 puts. This places Suntech's 10-day call/put ratio on the exchange at 5.02, roughly in line with yesterday's data.

Betting against the trend

The wave in bullish option buying on STP stands in stark contrast to the stock's recent technical performance. The shares of Suntech are down more than 40% year-to-date, having steadily crumpled under pressure from their 10-day and 20-day moving averages. STP's early-2008 losses stand in stark contrast to the stock's late-2007 performance, which saw the shares race steadily higher along support from these 2 trendlines.

DAILY CHART OF STP SINCE SEPTEMBER 2007 WITH 10-DAY AND 20-DAY MOVING AVERAGES

The monthly chart below better displays the spectacular rally STP turned in last year. After racing to such lofty heights, it might be possible that the shares were due for a price correction. While the stock's recent downtrend hasn't yet shown any signs of bottoming out, support from the equity's 20-month moving average could help stem the losses – this long-term trendline is currently rising through the 40 region.

MONTHLY CHART OF STP SINCE DECEMBER 2006 WITH 20-MONTH MOVING AVERAGE

But, with a wealth of optimistic bets being piled onto the shares, are expectations set dangerously high for Suntech?

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