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The solar sector continued its tear yesterday, as the shares of Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP) gained 52.4% to close at $1.28. The bullish price action had speculators lining up in the hopes of cashing in on the momentum, as call trading on STP spiked to 28 times its typical daily volume.
The most-targeted call was the June 1 strike, where nearly 10,200 options changed hands -- a majority at the ask price, suggesting they were bought. An overnight eruption in open interest indicates that new positions were being taken up, as well.
The volume-weighted average price (VWAP) for the calls was $0.22, for a breakeven price of $1.22 (strike price plus VWAP). In other words, by the end of Tuesday's session, the trades were already profitable -- perhaps prompting some speculators to close their positions to make a quick buck. Those that did not are hoping that Suntech continues to power its way upward through June 21 -- when front-month options expire -- since their gains are potentially unlimited. By contrast, potential losses are capped at the premium paid. Today, the stock has given back some of yesterday's gains and is currently off 17.2% at $1.06.
STP has experienced similar activity over the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The stock's 10-day ISE/CBOE/PHLX call/put volume ratio is 3.76, with calls bought to open besting puts by a count of nearly 4-to-1. That ratio lies in the 87th percentile of its annual range, betraying a bullish bias in Suntech Power's options pits.
Outside of those pits, sentiment is more negative. None of the four brokerages rating STP suggest buying it; rather, they all have evaluations of "hold" or worse. Meanwhile, a hefty 14.2% of the equity's available float has been shorted, which would take more than a week to cover at the stock's average daily trading volume.
That pessimism exists at all is strange. Yesterday was not the first time that Suntech Power has fared admirably -- indeed, over the past two months, the stock has bested the S&P 500 Index (SPX) by an incredible 172.5 percentage points. Suffice it to say, an unwinding of pessimism among the brokerage bunch or a short-squeeze scenario could throw even more gas on the security's fire.
Like I mentioned earlier, Suntech Power Holdings Co., Ltd.'s (ADR) (NYSE:STP) recent gains are part of a pattern that we've documented extensively at Schaeffer's, most recently with yesterday's commentary on Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE).