Options Traders Busy Amid SolarCity Corp (SCTY) Takeover Hype

Eleventh-hour call buyers hope SolarCity Corp (NASDAQ:SCTY) can sustain this week's rally

by Josh Selway

Published on Mar 4, 2016 at 12:24 PM
Updated on Jun 24, 2020 at 10:16 AM

Alternative energy stock SolarCity Corp (NASDAQ:SCTY) has been on fire this week, as rumors swirl that Elon Musk -- a large investor in SCTY, as well as its chairman -- wants to take the firm private. The stock's volume has been accelerated in recent days, and today it's on pace to arrive in the 98th percentile of its annual range. Options traders are also getting in on the action, with calls crossing at twice the expected intraday pace. 

Looking closer, traders have taken an intense interest in the weekly 3/4 series, which accounts for eight of the stock's top 10 strikes today. The 24- and 25-strike calls are among those in the lead, and if speculators are buying to open these options, they're betting on extended gains from the stock through today's close, when the weekly series expires. 

Call buying is nothing new on SCTY. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) has the stock's 10-day call/put volume ratio at 2.72. Not only does this mean almost three calls have been bought to open for every put, but the reading tops 78% of all others from the past year. This points to a stronger-than-usual preference for bullish bets over bearish. 

Shifting gears, SCTY's Schaeffer's Volatility Index (SVI) comes in at 149%, which is higher than 72% of similar readings from the previous 12 months. This suggests premiums are higher than usual among near-term options, from a historical perspective. At the same time, the solar stock's Schaeffer's Volatility Scorecard (SVS) stands at an elevated 91, hinting at its tendency to make outsized moves compared to what the options market has priced in over the last year. 

Elsewhere, optimism is heavy among analysts, with 11 of 15 saying the stock is at least a "buy," while none recommend selling it. Plus, SCTY's average 12-month price target is $44.50 -- a roughly 92% premium to current levels. 

The stock does have elevated short-interest levels, though -- like this surging sector peer. Specifically, almost 40% of SCTY's float is sold short. As such, the recent call-buying surge could be attributed in part to short sellers hedging their positions

As alluded to, SolarCity Corp (NASDAQ:SCTY) has been racing up the charts this week. Today's 3% pop puts the shares at $23.19, bringing their week-to-date gain to 23.4%. However, the stock is a huge underperformer on a long-term basis, as it's almost 64% off its 52-week high, and earlier was rejected by its 30-day moving average. If the optimism starts to fade, SCTY could face selling pressure as options traders and analysts turn bearish

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