FuelCell Will Stall or Start Hot – Here’s How to Profit Either Way

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Alternative energy specialist FuelCell Energy (FCEL) will step into the earning confessional after the close of trading on Monday, Sept. 8. Analysts are expecting the company to post a loss of 3 cents per share, but judging from competitor Plug Power’s (PLUG) blowout quarter thanks to soaring fuel cell demand, FuelCell could be poised to surprise the Street.

FuelCell Energy FCEL 185Currently, FCEL stock isn’t the most popular alternative energy holding on Wall Street. The firm has attracted a meager following of just five analysts; those with coverage have doled out two “buy” ratings and three “holds.” Furthermore, the 12-month consensus price target of $2.90 represents a modest premium of about 14% to yesterday’s close.

The biggest naysayers, however, lie within the short selling crowd.

As of the most recent reporting period, some 31.3 million shares of FCEL stock were sold short, and this after a roughly 6% decline in short interest from the prior period. As a result, more than 15% of FCEL’s float is sold short, providing ample fuel for a potential short covering rally on an earnings surprise.

That said, these short sellers might be hedging their bets ahead of next week’s earnings report.

During the past two weeks, the September/October put/call open interest ratio for FCEL stock has fallen from a reading of 0.47 to its current perch at 0.45. A decline in this ratio indicates that call open interest has risen faster than put open interest recently, possibly indicating that short sellers are stocking up on FCEL calls as a way to cover their short positions.

Taking a closer look, we find that peak call open interest totals 11,468 contracts at the Oct $3 strike. Other popular calls include the Oct $4 strike with 3,681 contracts and the Oct $5 strike with 3,837 contracts. On the put side, peak open interest lies at the Oct $2 strike, which sports 5,600 contracts.

FCEL stock chart
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Overall, September implieds are pricing in a potential post-earnings move of nearly 13%. This places the upper bound at $2.82, while the lower bound lies at $2.18.

A breakout to the upside would place FCEL above current resistance at $2.75, while a downside move should hold at support near $2.

Options Trade on FCEL Stock

Despite the expectation for a rather sizable move, however, implieds are considerably lower than they were heading into FuelCell’s prior quarterly report.

It looks like FCEL will make a big move — but which direction is very much in the air. Thus, it might make sense to enter a Sep $2.50 straddle.

For the straddle, purchase both a call and a put at the Sep $2.50 strike. At the close of trading on Wednesday, the FCEL Sep $2.50 straddle was offered at 32 cents, or $32 per pair of contracts. Breakeven for this trade lies at $2.82 on the upside, and at $2.18 on the downside.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/fuelcell-fcel-stock-straddle/.

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