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Market Summary
Last week the major equity indexes looked oversold and the chances looked good for a short-term rally. Surprisingly the only rally attempt came last Thursday and it was feeble at best. Our indicators are now even more oversold so chances are greater for an oversold bounce this week. Options trading investors should be wary of being long on the upside at this time.
Harbin Electric (NASDAQ: HRBN)
Based in Harbin, China, HRBN designs and manufactures linear motors and special electric motors with proprietary technology and core patents, built to a wide array of applications and industries. Currently selling at 7.6 times trailing 12-month earnings, with a forward price-to- earnings ratio of 6 and a price-to- earnings growth ratio of .49.
Chinese stocks have been under pressure in the US due to accounting and reporting irregularities and these concerns have probably helped to reduce the value of HRBN despite an offer in October from the firm’s CEO and Abax Global Capital to take the company private at $24. The stock was trading at $16.35 this morning.
However, doubts have been raised about the financing for the leveraged buyout of 60% of the company not already owned by the management group; and with the current market price now considerably below the offer we would not be surprised to see the buyout price reduced somewhat.
Using the Parkinson’s Historical Volatility of 73.43 and an Implied Volatility Index Mean of 162.65, the IV/HV ratio is of 2.22 and the put-call ratio is bearish at 2.0. Friday’s option volume was 30,257 contracts while the five-day average is 29,360 contracts.
Allowing some distance for the buyout price to be reduced, consider this put sale idea:
| B/S | Qty | O/C | U Sym | Exp | Strike | P/C | Price | IV |
| S | 1 | O | HRBN | Jul | 12.5 | Put | 2.18 | 217.05 |
Assuming there are no regulatory or accounting problems and the buyout offer proceeds — although at lower price — this position will be protected down to a price of just above 10 where the stock last traded in May of 2009.
The high options implied volatility means the risk is high so we suggest limiting the position size accordingly.
The above suggestion is based upon last Friday’s closing prices using the mid-price between the bid and ask. On Monday, the option price will be somewhat different due to the time decay over the weekend and any price change.
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