Example Short Strangle Strategy on This Green Stock

11/02/2009 10:53 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

First Solar, Inc. (FSLR) fell off a proverbial cliff last Thursday in the wake of its third quarter earnings report, which fell short of analysts' consensus revenue expectations. As traders considered the company's weak sales and quickly contracting margins, FSLR fell 16.6% on the session.

FSLR price chartThursday's plunge effectively snapped FSLR out of its trading range between $140 and $160, which had confined the equity's movements since mid-September. In fact, the equity didn't stop sliding until meeting up with former support in the $120 neighborhood. Judging by today's option activity, at least one speculator is looking for FSLR to find itself a fresh sideways channel to occupy during the short term.

Specifically, there seems to be a short strangle tucked away within today's option trading. At exactly noon, FSLR's December 135 call and December 120 put each saw a block of 175 contracts cross the tape. The calls traded closer to the bid price than the ask, while the puts traded squarely at the bid, indicating these contracts were most likely sold.

In a short strangle, the trader is looking for the underlying equity to remain pinned between the two sold strikes through expiration, allowing both options to expire worthless. The initial premium received from the sale of both options is the maximum potential profit.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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