2 Pre-Earnings Options Trades on Solar Stocks: YGE, JASO

by Joseph Hargett | March 13, 2014 11:03 am

2 Pre-Earnings Options Trades on Solar Stocks: YGE, JASO

Solar stocks are once again back in the limelight this week, as several players in the sector are preparing to step up and report earnings. Two such companies — JA Solar (JASO[1]) and Yingli Green Energy (YGE[2]) — will face considerable scrutiny when they slip into the earnings confessional early next week after fellow solar module manufacturer Canadian Solar (CSIQ[3]) missed Wall Street’s earnings expectations and provided weak guidance last week.

Here’s a look at a couple of potential options trades to make in solar stocks ahead of next week’s reports:

Solar Stocks: JA Solar (JASO)

Taking the lead for solar stocks next week, JA Solar will step up to release its fourth-quarter and fiscal 2013 reports ahead of the open on Monday, March 17. During its third-quarter report, JASO said that it anticipated shipping 500-550 MW of solar cells and modules[4] during the quarter and upwardly revised its full-year shipments to 1.9-1.95 GW from previous expectations of 1.7-1.9 GW.

Currently, Wall Street is anticipating a quarterly loss of 3 cents per share from JA Solar, according to Zacks. That said, the company still could post a profit, as JA Solar has bested the consensus estimate in each of the prior three reporting periods by an average of 7 cents per share. Given declining global subsidies for solar power, and a hard winter across much of the U.S., JASO has its work cut out for it.

In fact, investors and analysts are quite skeptical of JA Solar at the moment. For instance, JASO stock has garnered only three ratings from the brokerage community, all of them “holds.” Elsewhere, short sellers have loaded up on JASO stock, with the number of shorted shares spiking 43.7% during the most recent period to 8.76 million. As a result, some 33% of JASO stock’s float is sold short.

Options traders also are less than enthused with JASO stock. In the March/April series of options, JASO has attracted 54,174 calls compared to 47,062 puts. The result is a put/call open interest ratio of 0.87 for the front two months of options. Peak call open interest totals 14,645 contracts at the March 12 strike, while open interest at the March 11 and 12 put strikes totals 11,327 and 10,097 contracts, respectively.

Despite this negativity, JASO stock has performed quite well since the beginning of the year, rising nearly 20% along support at its 10- and 20-day moving averages. The shares’ one spot of weakness so far in 2014 was contained in the $8.5 region by JASO’s 200-day MA. The shares now face resistance in the $11.50-$12 region.

031314JASO 300x247 2 Pre Earnings Options Trades on Solar Stocks: YGE, JASO
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Digging a bit deeper, we find that March implieds for JASO stock are pricing in a potential post-earnings move of about 12.45%. This places the upper bound near $12.37, just shy of JASO’s November highs, and the lower bound near $9.63, just above the stock’s 200-day moving average.

With the bar set low for JA Solar heading into the company’s quarterly report, there is the potential for an earnings surprise come Monday morning — especially considering the company’s recent history of topping Wall Street’s estimates. It’s a risky play, but those looking to bet on a potential upside surprise could be well rewarded.

JASO Trade: As such, traders might consider an April 10/12 bull call spread. This spread was last offered at 75 cents, or $75 per pair of contracts. Breakeven lies at $10.75, while a maximum profit of $1.25, or $125 per pair of contracts, is possible if JASO closes at or above $12 when April options expire.

Solar Stocks: Yingli Green Energy (YGE)

Yingli Green Energy is next on the solar stocks earnings scene, as the company steps up to the plate ahead of the open on Tuesday, March 18. YGE stock has been busy lately, as investors have reacted to CSIQ’s quarterly report and news that Yingli just announced a large 27.5 MW supply agreement with Israel[5]. Look for this deal to have a potential impact on Yingli’s forward-looking statements.

For the record, Wall Street expects Yingli Green Energy to post a loss of 17 cents per share next week. Judging from Canadian Solar’s troubles and the fact that YGE has missed the consensus estimate by an average of 7 cents per share during the past four quarters, next week’s results could be much worse.

That said, Yingli offered some reassurance to investors last week when it said that it expects to report an 11% to 12% rise in panel shipments in the fourth quarter, up from prior guidance for a mid- to high-single-digit increase.

As with JA Solar, sentiment is quite bearish for YGE stock. Currently, Thomson/First Call reports that five of the eight analysts covering YGE stock rate it a “hold” or worse, compared to just three “buys.” Elsewhere, short interest rose 4.2% during the most recent reporting period, resulting in 24 million YGE shares, or 23% of the stock’s total float, sold short.

That said, option activity on YGE stock might be a sign that these short sellers are growing nervous. For instance, call open interest for the front two months totals 45,414 contracts, versus put open interest of 20,601 contracts. The result is a bullish put/call open interest ratio of 0.45, with calls more than doubling puts amid short-term options.

031314YGE 300x247 2 Pre Earnings Options Trades on Solar Stocks: YGE, JASO
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Technically, YGE stock has been quite volatile lately. The shares peaked near $8.50 in October 2013, then hit a bottom near $4.30 in December. The stock has since narrowed this range to the $7.5 to $5.5 area, with YGE currently hovering near the mid-point at just below $6. The shares are above their 200-day moving average, but have recently dipped below their 50-day trendline.

Returning to options activity, March implieds for YGE stock are pricing in a potential post-earnings move of about 13.3%. This places the upper bound near $6.80, while the lower bound lies at $5.20.

Trading YGE stock ahead of earnings will not be for the faint of heart. Guidance will be the key, and with the Israel deal on the books, YGE could well offer up better guidance than other solar stocks. Such a move could spark a short-covering rally, potentially sending the shares back toward the upper end of their recent range.

YGE Trade: With this in mind, traders might want to consider an April 5/7 bull call spread. This spread was last offered at 92 cents, or $92 per pair of contracts. Breakeven lies at $5.92, while a maximum profit of $1.08, or $108 per pair of contracts, is possible if YGE closes at or above $7 when April options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Endnotes:
  1. JASO: http://studio-5.financialcontent.com/investplace/quote?Symbol=JASO
  2. YGE: http://studio-5.financialcontent.com/investplace/quote?Symbol=YGE
  3. CSIQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSIQ
  4. anticipated shipping 500-550 MW of solar cells and modules: http://www.zacks.com/stock/news/115485/JA-Solar-Narrows-Q3-Loss-Lifts-View
  5. large 27.5 MW supply agreement with Israel: http://www.marketwatch.com/story/yingli-green-energy-signs-its-largest-module-supply-agreement-to-date-in-israel-2014-03-10

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