What Happened to First Solar?

by Jeff on November 5, 2009

tog_logo_bw_new_iconAfter First Solar (FSLR) announced their earnings, I wrote about the event (on 10/29) trying to analyze why the stock took a digger and dropped from $151 to $127. My conclusion had to do with the continuing slide in revenue and that the March recovery for most of the market didn’t include them.

Normally I don’t go into this much analysis for a trade, but I have traded First Solar for a couple of years and it’s one of my top 10 stocks for trading – that’s not to say it’s necessarily a ‘good’ company, it’s just that the stock makes some nice moves for my trading methodology. So for those top 10 companies, I also follow their fundamentals.

I waited until 10/30 to see if there was any life left in the price – there was not – so I entered a Bear Call spread at the 140/145 level for a nice credit of $57 per combo. So far (see the chart below) the market is proving that it doesn’t like that revenue decrease either.

20091105-fslr-chart

Priceline.com (PCLN), another of my top 10, is announcing this Monday, 11/9. This stock traditionally makes big moves on that day, but the direction is always a mystery to me and, I think, to everyone else. Can it be played? Yes, there are a few strategies that can make a some bucks no matter which way it goes, but, as always, there is risk. One way of playing this is by BUYING and Iron Condor, rather than SELLING one. An Iron Condor is usually SOLD for a credit if you expect the stock to trade within a range (between the short strike prices) until expiration. But BUYING and Iron Condor is the opposite, where you expect the stock to trade beyond the short strikes.

Using the TOS Risk Profile tool (below), the best scenario appears to be BUYING a 175/180/160/155 Iron Condor. One combo will cost (as of this moment) $350 and the maximum profit would be $160. Not a bad return, but here’s the nut: the price of the stock must move lower than 154.50 or higher than180.50 to realize the max profit – and that’s only at expiration.

20091105-pcln-risk-graph

Is it worth the risk? Not with my money, but it is an interesting strategy and that’s why I am doing it in my paper account today. I will let you know how it works out.

Thanks for reading. Your comments/suggestions/corrections are always welcome.

- Jeff

Tagged as: bear call spread, Iron Condor, options, Strategy, Vertical Spread

  • Frederic
    Jeff,
    What about buying a Nov straddle at the money a day or 2 before earnings and selling a day or 2 after earnings. if volatility is too high for the current month series, look at another month with lower volatily. I backtested that on FSLR, another stock that moves big on earnings and it was pretty successful.
    Fred
  • Jeff
    Frederic,

    I have tried straddles on earnings, and even on PCLN once. I might have been doing something wrong since I didn't make all that much money. What happened is the stock went up so I sold my Put, then the stock went sideways for a few days. I was losing a lot of time value so I had to get out. I ended up with a small profit - not as much as I had expected. Good idea to back test - I think I will give it a try too. It should be interesting now since PCLN is now on the S&P 500 - did you see the volume today?

    - Jeff
  • Frederic
    When I backtest, i use the TOS thinkback tool and I buy a straddle before earnings and sell a straddle after earnings. I don't try to sell only the winning side and hold on to the loosing side hoping for a reversal. It could work, but in most cases won't.
  • Jeff
    Frederic,

    I didn't sell the winning side, I sold the losing side and held the winner. I am going to try to replicate your FSLR back test assuming you tested their latest earnings debacle.

    - Jeff
  • Jeff
    Voila! That back test resulted in a $800 win on a $215 risk. Not bad!

    - Jeff
  • Frederic
    how did you calculate your risk? By multiplying theta decay by the # of days you held the trade? It makes sense but you also need to consider vega in this case because volatility is always greater before earnings than afterwards and you lose a lot when you buy at high volatility and sell at lower volatility.
    Your real ROI is 800/(money req'd for purchase of straddle) and not 800/215= 372%. It more or less matches the percentage drop in the stock.
    I saw you placed a real trade on PLCN. I hope you bought in a low volatility month. Can't wait to see what happens.
    Frederic

    PS: I'm backtesting another strategy that I have put together. So far it seems like a 20% a year ROI "guaranteed" no matter what the underlying does as long as it doesn't go bankrupt. I backtested with thinkback from 1/2/07 until mid october with QQQQ and I got 77% ROI over 1000 days roughly. I'm currently backtesting IWM and will do DIA and SPY. But it looks promising!!!
  • Jeff
    Frederic,

    I will let everyone know on Tuesday how PCLN turned out.

    I too am back testing a conservative strategy. The first underlying I did was AFL starting on 10/30/07 just buying the stock and doing CC and protective puts according to a set of rules. I started with around $31,000 on that date and as of 10/31/09 it's worth about $62,000. I am working on DIA right now. It's a painstaking process but worth it. When I am done I will put all the detail in a document that can be downloaded. I can't wait to hear about you method - if you will share.

    - Jeff
  • Frederic
    Jeff,

    I'm curious and interested in your methodology. So far, it looks as if it is promising, and even much better than mine.

    Anyway, my idea was to buy a deep ITM LEAPS Call with a delta around .85 and a deep ITM LEAPS Put with a delta around -.85. This can be bought as a strangle. IF the spread between strikes is $50, you'll be paying around 53-54 depending on volatility. So realistically, only the difference is really at risk if nothing gets done until expiration and the underlying finishes between the strikes. I usually chose the farthest LEAPS series available.

    Then every month, I sell 1/3 covered calls and puts against my LEAPS. My criterium is a prob of expiring closest to 25%. Then when there's .05 of time value left in the options, i buy them back for no commissions. Depending on the situation, I might buy the option back when its time value is 10% of its original time value when i sold it.
    If both call and put written are OTM at expiration then I do the same thing over again. If one side ends up ITM when the intrinsic value reaches .05, then I roll by buying back the ITM options and writing as many ATM options necessary in order to get a credit on the spread. It's a custom spread but a spread nevertheless. This is the entire reason for only writing 1/3 covered calls and puts. The 2/3 left come in handy when price moves violently. And this happens often enough.
    Then once a year I readjust my LEAPS strangle and hopefully make a profit as well on that. In a year, the price usually moves enough to achieve this. Then i roll to a new strangle even farther out, using the profits made to increase the number of contracts in order to increase the number of options written every months as well and get more income.

    I hope it's clear enough. I can send you my backtest spreadsheet for the Qs too if you want. Let me know your email address and i'll do that.
    Frederic
  • Frederic
    Hi Jeff,
    Anything new on your conservative strategy. I'd love to start exploring it...
    Also, I like your "T" pick for a CSP. I have been eyeing it for a bit but I chose INTC instead. Doing a diagonal on it as well as on MSFT. Caught MSFT just before it starting climbing.
    Email me your strategy at your convenience if you want. Thanks.
    Frederic
  • Jeff
    Frederic,

    I don't really have a documented strategy for the conservative fund. I am looking for good companies with a decent dividend (3% yield or better) that have pulled back and a CSP will get me into the stock near the recent low if I get put the shares. I am looking for near month or next month expiration that will give me a minimum of 3% return on my margin. That's about it in a nutshell, Frederic. I wish I had something more substantial.

    After I am in the stock I will either write Calls or buy Puts and maybe do both - depending on where the price is in its trend. I intend to hold them as long as I can milk them.

    With that in mind, I am taking a very serious look at KFT for a JAN 27.50 Put and VLO for a JAN 16 or 15 Put. Any of those will give me better than 3% over the next 53 days.

    - Jeff
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