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LDK Solar Co. (LDK) Option Traders See a Short-Term Surge

Calls have been the options of choice on uptrending LDK

by 2/20/2013 10:18 AM
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LDK Solar Co., Ltd (ADR) (NYSE:LDK - 1.95) powered higher on Tuesday, as the solar power concern followed in the bullish footsteps of sector peers SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR). One group of option bulls took notice, and placed bets on this upward momentum to continue in the near term.

By the time the bell sounded, more than 2,300 calls had crossed the tape, representing a 54% mark-up to the average daily volume. Nearly 60% of these contracts traded at LDK's March 2 call -- a healthy portion of which went off at the ask price. With open interest rising overnight, and data from the International Securities Exchange (ISE) pointing to the initiation of fresh positions, it seems that a portion of yesterday's activity was of the buy-to-open variety.

By purchasing these out-of-the-money calls for a volume-weighted average price (VWAP) of $0.20, traders will begin to profit with each step north of $2.20 (strike plus VWAP) LDK takes through the close on Friday, March 15 -- when front-month options expire. At yesterday's close, delta for this strike was perched at 0.49, or 49%, meaning the option's market has given the calls a roughly 1-in-2 chance of finishing in the money by expiration. Should LDK fail to muscle 12.8% higher to land above breakeven, the most Tuesday's call buyers have risked is the initial premium paid.

Yesterday's bullishly skewed bias is nothing new for option players, per data from the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 10 sessions, traders have bought to open 3,327 calls, compared to just 199 puts. The resultant call/put volume ratio of 16.72 ranks higher than 87% of other similar readings taken in the past year, suggesting bullish bets have been placed over bearish at an accelerated clip in recent weeks.

Plus, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.94 ranks just 1 percentage point shy of an annual low. In other words, short-term speculators have rarely been more call-heavy toward LDK.

Technically, the stock has been in a solid uptrend in recent months, which could be attracting the attention of these bullish bettors. In fact, the shares have bounced around 175% from their all-time low of $0.71, which was tagged on Oct. 19. What's more, the security has outperformed the broader S&P 500 Index (SPX) by nearly 95 percentage points during the past three months.


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