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Mid-Cap Options Update: SunEdison Inc (SUNE)

SunEdison Inc call sellers eye the $20 level

by 3/27/2014 1:16 PM
Stocks quoted in this article:

The 20 stocks listed below are the members of the S&P MidCap 400 Index (MID) that have seen the highest total options volume (calls and puts combined) during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. One equity seeing elevated option volume today is solar energy concern SunEdison Inc (NYSE:SUNE).


The SUNE options pits are active today; call volume is outpacing typical intraday levels by 22%, while put volume stands at a 50% mark-up to what's seen during an average session. Most active is the May 20 call, where north of 9,000 contracts have changed hands. Although volume exceeds open interest by a healthy margin and implied volatility has moved 7 percentage points higher, it doesn't appear that these are garden-variety bullish bets.

Instead, because the bulk of the volume (including one block of 4,836 contracts) traded at or near the bid price, it is likely a healthy chunk of these calls were sold to open, as a wager that SUNE will be unable to surmount the $20 level before May options expire. This is a relatively aggressive bet; SUNE closed above $20 as recently as last Friday. What's more, delta for the call stands at 0.42, implying a greater than 2-in-5 chance the calls will be in the money at expiration on May 16.

Given SUNE's strong performance on the charts -- the stock has gained roughly 317% during the last 12 months -- it is possible this is a covered call strategy at work. In this scenario, the call sellers already hold shares of stock, which they are willing to relinquish at $20 per share, should they be assigned. In the meantime, they keep the premium collected for selling the calls as added income. The current premium (a volume-weighted average price of $1.22) is relatively inflated, historically speaking. The implied volatility for the May 20 call stands at 77.5%, compared to the two-month historical volatility of 58.5%. In other words, the call sellers are reaping the benefits of higher option prices.

Today's speculators could also be looking to pinpoint an exit point ahead of the company's earnings report, which is expected the week of May 5. During the last eight quarters, SUNE has handed in four positive earnings surprises and four negative ones, and has dropped an average of 3.8% in the day following its earnings report. Still, SunEdison Inc (NYSE:SUNE) has also managed to quickly recovery from any post-earnings setbacks, as its average weekly post-earnings return is just over 3%.


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