Another earnings surprise knocked $10 off First Solar tonight even though the earnings were good.

First Solar reported earnings of $2.21 per share compared to analyst estimates for $1.95 per share. Revenue rose a whopping 66% to $798 million and beating estimates of $779 million. FSLR raised guidance or the full year to a median of $7.57 compared to the prior forecast of $7.20. So far so good but there was a problem.

Because of the falling subsidies in Europe the actual prices received for the products have been declining. FSLR is the lowest cost producer but margins shrank from 49.3% to 40.3% quarter to quarter.

When you look at the outstanding increase in revenues and profits and the increased guidance I don't see how anyone could fault the company even though the margins have declined. They are doing significantly more business and sales are booming. They have also moved into a phase where they contract out to build the actual power plants for major companies. They will have 2.7 gigawatts in 2012 and their backlog is currently 2 gigawatts. One GW is equal to the power of a nuclear reactor. That business was 22% of revenue, up from 15% in Q2.

I believe the FSLR story is even stronger today than it was in the past. I believe the sell off tonight is overdone.

We are short the November $130 put with three weeks until expiration. FSLR closed at $141 in after hours. Our stop loss was $145 but we can't stop out options in after hours. I am going to recommend we remove the stop for Friday because the $141 level is decent support. We could see an opening drop but also a potential rebound as the solar faithful jump on this buying opportunity.

If we were NOT in FSLR today I would view it as an excellent opportunity to enter a new short put position.

When we were stopped out on yesterday I quoted the exit at $1.05. An astute reader emailed me a correction to $1.35. I did check and there were multiple executions in those ranges as Ctrip fell through our $50.25 stop. As you know I always ask for your input on fills and I will always use your reported prices for the official reporting.

I add the official pricing disclaimer to the newsletter about once a week. Please read it tonight and you will understand how this happens.

Jim Brown

Current Portfolio

Current Position Changes

FSLR - First Solar - Remove Stop

Per the explanation in the commentary please remove the stop loss on First Solar for Friday. I want to avoid being stopped on any carry over opening dip and then watch in frustration as the stock rebounds.

REMOVE STOP on short FSLR NOV $130 Put

First Solar Chart

New Recommendations


Margin Requirements:

There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.

Here is the most common margin calculation for naked puts.

100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))

For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)

Prices Quoted in Newsletter

At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.