The prodigal sun returns
07/27/17

Are you ready for a solar flare? At least some traders seem to be.

For those keeping score, solar energy stocks began 2017 left for dead. Lawmakers were killing their subsidies, we were told.1 Competition was killing their margins, the warnings said.2 Trump’s fossil-fuel affections left them forlorn and forsaken in the halls of power, the hand-wringers declared.3

But is hasn’t worked out that way. Companies in the sector have clawed back from long-term lows, outperforming the broader market by a wide margin as analysts begin to see rays of sunlight through the gloom.4 Most names in the space have even left the red-hot technology sector in the dust on a year-to-date basis.

Options activity started to glow last month as the stocks began to rip higher. Yesterday, the bulls went back to work in the middle of lunch hour:

  • True to its name, the first trade appeared in First Solar (NASDAQ: FSLR). Traders bought 1,000 28-July 46.50 calls for $1.39 and sold a matching number of 28-July 50.50 calls for $0.38. That nets out to a cost of $1.01.
  • Owning calls fix the price where a security can be purchased, while selling them fixes a level where they must be delivered. Combining the two is known as a vertical spread – a common leveraging technique.
  • Simply put, the strategy’s value will inflate to $4 if FSLR closes at $50.50 or higher on expiration this Friday. That would represent a potential profit of almost 300 percent based on its $1.01 entry cost. Breakeven is at $47.51 and the entire position will become worthless if the stock remains below $46.50. 
  • FSLR ended the session down 0.02 percent to $45.44. The company also reports earnings tonight, so it looks like someone was hoping for a strong set of numbers.
SunPower (SPWR), 7/26/16 - 7/26/17 chart

Source: OptionsHouse by E*TRADE

More buying was detected in rival SunPower (NASDAQ: SPWR) a few minutes later. This time, traders kept it simple and snapped up 4,100 28-July 10.50 calls for $0.66 to $0.70. 

SPWR rose 0.18 percent to $11.01. While its earnings aren’t due until next Tuesday, Aug. 1, chart watchers may also be fixated on a single session last summer when the stock plunged all the way down from about $14 to $10, and remained stuck ever since. With no clear resistance holding it back, will that “price gap” get filled – especially with the potential need for bears to cover their hefty short bets against the company?5

Bottom line: Solar stocks are trying to crest over the horizon once more, and options traders continue to position for upside in the space.

 

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1. Fox News: Nevada starts to pull the plug on solar subsidies. 8/11/16.

2. Inhabitat.com: The cost of solar power has fallen 25% in just five months. 10/6/16.

3. Washington Post: Trump’s energy plan doesn’t mention solar, an industry that just added 51,000 jobs. 2/7/17.

4. Reuters: SolarEdge stock could jump 40 percent in within year: Barron's. 3/26/17. Bank of America Merrill Lynch: Solar sector not quite out of the woods, but is bottoming. FSLR is best positioned. 7/25/17. Benzinga: Top Solar Analyst Likens Canadian Solar To SunPower, First Solar From 2012. 4/17/17.

5. Investopedia: Playing The Gap. Short interest in SPWR was 34% of the float, according to Yahoo Finance's Key Statistics page.