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Long-Term Skeptics Sell SolarCity Corp (SCTY) Calls

SolarCity Corp's (SCTY) January 2015 60-strike call was popular yesterday

by 4/22/2014 9:26 AM
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SolarCity Corp (NASDAQ:SCTY) calls traded at more than double the rate of puts yesterday. Accounting for nearly one-third of the call volume was the alternative energy concern's January 2015 60 strike, which saw close to 4,100 contracts cross the tape.

Unlike typical "vanilla" call buyers, however, yesterday's traders sold the contracts to open. Specifically, 64% of the volume at the LEAPS strike changed hands at the bid price, hinting at seller-driven activity. What's more, implied volatility rose at the strike, and open interest added 3,655 positions overnight, suggesting fresh neutral-to-bearish initiations.

This strategy is not particularly unique in SCTY's options pits. After all, during the past 10 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), nearly 12,700 calls were sold to open -- exceeding the roughly 11,200 that were bought to open.

Returning to Monday's most active strike, the call writers expect SCTY shares will remain below $60 through January 2015 options expiration. If they don't, however, the traders are at risk of assignment, which carries with it theoretically unlimited losses.

Of course, given the fact that SolarCity Corp (NASDAQ:SCTY) stock has almost tripled in value during the past year to trade at $57.13, yesterday's call writers may also be long the shares. If that's the case, they may have sold the contracts in order to collect premium or help offset future pullbacks in the equity. At the same time, though, covered call sellers risk having to deliver their SCTY shares if they rally beyond $60, and missing out on any potential upside in the underlying.


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