LDK’s calls and puts for March strike 22.50 at 1.40 provide an attractive opportunity!

Posted by Jack Haddad on March 9, 2008 at 6:19 pm

Team,

The solar sector has tanken a beating as of late… This is particularly true for TSL, FSLR, SOLF, LDK.

I direct your attention to LDK which is now trading at 6 times 2009 earnings with a PEG of .12! The earnings figures for 2008 are evident by LDK’s production plkans for the remainder of the year. LDK is currently building a polysilicone manufacturing plant. Fluor is the contractor, so there is no question of it being substandard. LDK has brought top level managers from such companies as MEMC Electronic Materials to oversee all of its production and to hire and train the people necessary to run the plant. LDK’s earnings for 2009 will likely be close to the high estimate of $7.15. That would mean that LDK is trading closer to 3-4 times 2009 earnings today; and it is a 100% grower. Moreover, the company would be able to show gross margins of 40-50% with a functioning polysilicone plant in 2009. This margin figure would be competitive with FSLR’s, which is currently trading at approximately 39 times 2009 earnings. Would you rather buy a company showing the same gross margins (40-50%) which costs 6 to 13 times less based on 2009 earnings results? Or would you rather pay for a brand name.

As of last Friday, the shares closed at 22.49 which compelled me to examine March strike 22.50 calls and puts. Both calls and puts are paying roughly the same premium per contract: 1.40 for every 100 shares! Since theyre identical in premium, I recommend writing either with the shares. For example, buy the shares and and simultaneously write (”sell to open”) either the calls or puts for march strike 22.50. Since the strike equals the share price, both option types are termed “at the money” type options. They both offer a downside of 1.40 per 100 shares.

Be adivsed thart I have not taken a position in LDK yet. However, I will be looking at the shares Monday morning.

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