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May 21, 2013  Tue 4:45 AM CT

JASO: SEE CHART GET CHAIN FIND STRATEGIES
JA Solar skyrocketed after reporting earnings yesterday morning, and options traders followed up with bullish call buying in the Chinese company throughout the session.

optionMONSTER's Heat Seeker system detected heavy buying at several strikes yesterday, led by the June 8 calls. More than 4,800 of those contracts traded as premiums rose from just $0.15 to $2.53 by the end of the session, clearly new positions because the strike's open interest was a mere 76 before the session began. Our systems also found buying in the September 8 calls and selling in the June 6 puts.

The traders who bought the earliest calls turned quick profits as JASO climbed steadily to close $9.56, a whopping 70.37 percent gain on the day. The Shanghai-based solar-cell manufacturer topped first-quarter estimates on the top and bottom lines, citing strength in Japan and inroads in emerging markets.

Long calls lock in the price where traders can buy a stock no matter how high it rises, but their premiums fall quickly if the shares don't rise. (See our Education section)

Total option volume in JA Solar exceeded 26,000 contracts yesterday, compared with a daily average of only 324 for the last month. Calls outnumbered puts by more than 2.5 to 1.

The surge in JASO lifted the entire industry yesterday, making the solar group the top gainer on our researchLAB market-analysis service. The onetime high-flying group had been beaten down mercilessly in previous years but have been making a comeback, rising more than 50 percent in just the last month, as shown in the screen shot below.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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