Investors in Daqo New Energy Corp. DQ need to pay close attention to the stock based on moves in the options market lately. That is because the Oct 18, 2024 $35.00 Put had some of the highest implied volatility of all equity options today.
Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell-off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.
Clearly, options traders are pricing in a big move for Daqo New Energy shares, but what is the fundamental picture for the company? Currently, Daqo New Energy is a Zacks Rank #5 (Strong Sell) in the Chemical - Specialty industry that ranks in the Bottom 20% of our Zacks Industry Rank. Over the last 60 days, no analysts have increased their earnings estimates for the current quarter, while one analyst has revised the estimate downward. The net effect has taken our Zacks Consensus Estimate for the current quarter from an earnings of 38 cents per share to a loss of 80 cents in that period.
Given the way analysts feel about Daqo New Energy right now, this huge implied volatility could mean there’s a trade developing. Oftentimes, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.
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