Call Volume Surges on Evergreen Solar (ESLR); Spooks Short Sellers

12/10/2009 12:01 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Call volume surged yesterday on Evergreen Solar, Inc. (ESLR), with activity ramping up to six times the usual level. Nearly 3,000 calls were traded on the solar stock, compared to its average daily volume of just 461 contracts. The day's activity appears to have been primarily driven by buyers. During the course of Monday's session, option players on the International Securities Exchange (ISE) bought to open 1,241 calls on ESLR, compared to just one put.

ESLR price chartMonday's most active strike was ESLR's out-of-the-money January 2010 2 call, where 2,382 contracts changed hands. About 58% of these contracts traded at the ask price, revealing a skew toward buying activity, and implied volatility climbed 4.4% as a result. Open interest at the January 2 call spiked overnight from 952 contracts to 3,309 contracts, confirming that traders were adding new calls here yesterday.

This rabid interest in calls is nothing new for ESLR, as the stock sports a ten-day ISE call/put volume ratio of 10.16. This ratio ranks near the middle of its annual range, suggesting that speculative investors regularly prefer to buy calls over puts on the equity.

However, it's not necessarily a given that traders who buy calls on ESLR are bullish on the stock's prospects. Short interest on the shares rose by 9.1% during the past month, and now accounts for 11.7% of the stock's float. In this context, it's likely that some option players are buying calls simply to hedge their short stock positions.

After checking out the charts, the bears have some justification for feeling anxious. ESLR has recently turned higher, pulling its ten- and 20-day moving averages to the verge of a bullish cross.

On the other hand, it's probably too early to cut and run on a short stock position, with the shares fast approaching familiar resistance in the $1.60 region. In fact, the equity pulled back today after topping out at an intraday high of $1.58.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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