First Solar (NASDAQ:FSLR) hosted an analyst meeting Tuesday and delivered an epic gift to shareholders — earnings guidance for 2013 that blew the Street’s estimates out of the water. The upbeat comments drove the stock into the stratosphere, rocketing over 45% higher by the closing bell.
Click to Enlarge The breathtaking move likely was fueled by a throng of short sellers running for cover in a classic squeeze. With more than 30% of its float sold short, FSLR was a veritable gathering ground for the bears. While these naysayers might have started to see their bearish thesis gain some traction — FSLR was down 12.3% for the year heading into Tuesday’s meeting — they’ve obviously been dealt a painful blow.
Just as a multitude of stock owners who head for the exits simultaneously can lead to an outsized drop in a stock, a mass of short sellers simultaneously buying to cover their positions can lead to an outsized rally. It’s a good bet many such short sellers finally reached their pain thresholds in FSLR on Tuesday and bailed on their shorts.
While the continued exit of these beleaguered bears may lead to a few additional days of upside, I suspect the bulk of the rally is over at this stage.
Click to Enlarge Not surprisingly, traders’ appetite for FSLR options increased alongside the rise in its share price. The implied volatility for April options rallied from 62% just before the announcement to 81% by day’s end. If you think the pop in FSLR is likely to peter out and implied volatility is likely to settle down in the coming week, selling April bear call spreads might not be a bad way to go here.
You could sell the April 42-46 call spread for 71 cents credit. Consider it a bet that FSLR will not rally above $42 by expiration next Friday. The max reward is limited to the initial 71 cents, and the max risk is limited to the distance between strikes minus the net credit, or $3.29.
In timing the trade I’d suggest waiting for signs that the upward thrust of FSLR is waning. After all, if the stock continues ripping higher, there’s no sense in shorting call spreads at this stage. Look for some type of intraday downtrend or bearish daily candle to form before pulling the trigger.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.