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The shares of First Solar, Inc. (NASDAQ:FSLR – 26.06) bucked the broad-market trend lower on Tuesday, ending north of $26 for the first time since March. Against this backdrop, call volume popped on the solar stock, soaring to three times the norm. However, while many investors employed these options for traditional, bullish reasons, it looks like one used them as part of an "options insurance" plan.
During the course of the session, FSLR saw roughly 50,000 calls change hands, compared to its average daily volume of around 15,000 calls. Most popular was the weekly 27-strike call, which saw close to 8,500 contracts traded -- mostly at the ask price, suggesting they were bought. Plus, call open interest at the soon-to-expire strike swelled overnight, confirming our theory of newly added positions.
By purchasing the calls to open, the buyers expect FSLR to surmount the $27 level by the end of the week. More specifically, the volume-weighted average price (VWAP) of the calls was $0.43, meaning the buyers will reap a reward if FSLR topples the $27.43 level (strike plus average premium paid) by Friday's close. However, even if the stock remains south of the strike, the buyers' maximum risk is limited to the initial premium paid for the calls.
As alluded to earlier, it seems one strategist employed calls as part of a "share protection" trade. Jumping right in, the trader bought to open 3,000 January 23 puts for $1.42 apiece, and then paid for them by selling to open an equal amount of January 27 calls for $1.61 each, resulting in a net credit of $0.19 per pair of options. Assuming the investor was establishing a collar -- meaning he owns FSLR shares -- he's essentially bracing for a bit of stagnation or a short-term pullback.
Technically speaking, FSLR has more than doubled since touching a low of $11.43 in mid-June, ushered higher atop support at its 10-week moving average. From a contrarian perspective, there could be more gas in the tank, should the bears on the Street abandon ship. Despite depleting by 5.3% during the most recent reporting period, short interest still accounts for nearly 47% of FSLR's total available float. In fact, at the equity's average pace of trading, it would take more than a week to buy back all of these bearish bets -- plenty of fuel for a short-covering rally.
At last check, FSLR has pulled back along with the broader equities market, shedding 1%.