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Solar's Short Squeeze Days Are Numbered

The odds are against you if you buy at the close, but that doesn't mean there isn't profit opportunity. With the odds stacked up so heavily on one side, it's clear the smart money choice is to short the stock. Short selling stocks isn't for everyone, especially if you don't fully understand the mechanics of shorting. Another method to align the odds in your favor is to buy put options.

While option premiums tend to jump higher during a stock plummet, "melt ups" usually don't cause as much of a spike in volatility. Since options offer a way to exploit a price move lower while capping the potential risk, options can make an excellent entry vehicle into the world of short selling.

To learn more about using options to exploit volatility for profit, get a copy of Options For Volatile Markets by Richard Lehman and Larry McMillan. It's a fantastic book for investors wanting to learn how to manage portfolio risk. Any book by McMillan is a good investment, though. I own a few and give them all high ratings. I wouldn't give such high ratings to the SEC today.

I counted three trading halts while watching the price action of First Solar. Within the solar space, First Solar was the one I paid the closest attention to. I don't see the point in having multiple trading halts for a stock in play.

I get the idea of maybe one halt, but after the first one, the buyers and sellers already know the stock is in a fast market. If you listened carefully, you could almost hear the shorts howling in agony after each circuit breaker trading halt. The final halt I recall was when the price started to fall.

Because a percentage change is used as the basis of a circuit breaker halt, stocks with small prices (under $10) can essentially spend more time halted then trading. I believe the threshold is a 10% move with five minutes.

We already covered the expected peril of buying into a price spike, let's cover what started the spike to begin with. If you haven't read already, First Solar held an analyst day and provided full year 2013 guidance. A few of the numbers released took investors by surprise, especially short sellers.

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