New Solar Trade

• stevenplace
• January 4th, 2010

This new trade is in YGE. First, the technical picture:

This has been a potential breakout for a while now, and it’s been mentioned by my friend Brian (alphatrends) since about November.

The overall trend is up, and there is resistance at these levels. If it can clear it, 18 and change should be in short order.

Here are the volatility bands:

With volatility contracted, it can easily start riding the Bollinger Band to the upside. I’m expecting a move to the upside in both direction and momentum.

I also saw this come across the options board:

As these trades were put on at the same time, I think it’s safe to assume that we are seeing a large block trade in YGE options. Notice that both calls and puts are being bought. Looking at the current volume, it seems that we’re seeing an unbalanced straddle buy. The trader is essentially buying 2x 16 calls and 1x 16 puts.

This is the trade I want to take. Here’s the thinkorswim copy:

BUY +6 YGE 100 JAN 10 16 CALL @.80 LMT

BUY +3 YGE 100 JAN 10 16 PUT @.50 LMT

Here’s the situations I’m looking at:

1. YGE Rips higher and runs to 18.

2. YGE pulls back and finds support at 14.50

3. YGE stays in its range between 17 and 14.50

Clearly scenario 3 is the worst situation here. If it doesn’t do anything, the premium in our position will continue to erode and we will be at a significant loss. If we get our optimal situation (run to 18) we’re looking at a double and our calls gain intrinsic value.

The put buys give us some extra versatility; if YGE pulls back to previous support around 1480, then we can pull off those puts for a profit and roll our calls out to the February 15 calls and our drawdown will be around 150. From there we can set a tight stop and look for further upside. If we get a sharp move to the downside, we should see an increase in implied volatility so that will help our position.

Our theta is the biggest problem here; we’ve only 2 weeks left before they expire. So this is a situation in which we need a “time stop.” For this situation, I am using the bollinger band envelope as my guide. The best odds for continued momentum is for price to stay within the 1st and 2nd standard deviation (blue and green). As long as price closes above there, I will hold onto the position. If the position is not profitable by Friday, we will cut it.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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