Shares of First Solar (FSLR, $20.91, up $0.31) cleared $20 yesterday and have traded up to $21.69 today. The stock is off its highs but the strangle trade we profiled in our Weekly Wrap on Sunday and in the Daily Tuesday morning for First Solar hit our targets this morning. The trade was up over 130% shortly after the bell which is when you should have cashed out the call options so let’s go over how it went down.
Tuesday’s morning’s DAILY update:
Here were our thoughts in Sunday night’s Weekly Wrap (8/5/12) and the
option prices from Friday’s close (8/3/12):
“This looks like a good opportunity for a straddle or strangle option trade, if there is any follow through or a pullback. Keep an eye on the September 20 calls (FSLR120922C00020000, $0.65, down $0.35) for a quick trade if shares can regain their momentum following Friday’s 5% pullback. If not, watch the September 14 puts (FSLR120922P00014000, $0.70, up $0.15) for a drop back below $15. Together, the calls and puts would form a strangle option trade to whereas First Solar would need to be above $21 or below $13 by mid-September for the trade to have success.”
The September 20 calls (FSLR120922C00020000, $1.40, up $0.75) opened at 66 cents on Monday and zoomed nearly 120% for the day. The September 14 puts (FSLR120922P00014000, $0.40, down $0.30) opened at 59 cents. The total cost of the trade would have been $1.25, or $1,250 for 10 contracts each. The value of both the call and put options are currently at $1.80, or $1,800, which is already a 44% gain in 24 hours.
The object of strangle option trades is to make over 100% or more on one side of the position to cover the cost. Once the call or put gives you a triple-digit gain, you close that side of the trade to lock-in profits.
You would then have a free call or put to play a reverse.
In this case, if you sell the First Solar calls into strength now or on a pop over $20, the puts become house money and have over a month before they expire. If shares move lower and fall below $14 the September 14 puts would then be “in-the-money” which would allow you to profit from both sides of the trade. (END)
Tuesday’s close: The September 20 calls FSLR120922C00020000, $2.45, up $0.20) closed at $2.25 yesterday. The September 14 puts closed at 25 cents. The total value of the options is $2.50. The entry price on Monday morning at the open was $1.25. The return was at a 100% at yesterday’s close and shares are up today.
The calls traded to a high of $2.88 this morning after opening at 2.67. Let’s say you were able to close them at the open for $2.70. The 10 contracts you sold would have netted you $2,700. The original cost for both the calls and puts was $1,250. This would get the return up to 136% and the September 14 puts (FSLR120922P00014000, $0.25, down $0.15) are still open.
You could also close the put options now to lock-in the return but they are at 20 cents and they are free puts to play any downside until mid-September. It is only $200 and if the put options expire worthless because shares remain above $14, the trade would still return 116%. If shares trade to $13, the puts would then be worth $1 or an extra $1,000 (10 contracts) which would get the return to 196%.
We may use these types of option trades in our next batch of recommendations as we try to offset some of the volatility. We are sorry we didn’t make this an “official” recommendation but we wanted to get everyone comfortable with strangle option trades in case we need to use this strategy going forward.
For those of you who DID take the trade, this will be our last update on the options as we have fielded numerous emails on what to do today.
As far as the market, we are still in a wait-and-see-mood. The indexes traded lower at the open but have rebounded and are pushing greener pastures.
The Dow is up 16 points to 13,184 while the S&P 500 is higher by a a point to 1,402. The Nasdaq is down a half-point to 3,016. The indexes did slip below support which was prior resistance and the close will be interesting today.
Subscribers, check the Members Area for the updates.