It’s time again for FuelCell Energy Inc. (FCEL) to step into the earnings confessional, and the stock’s outlook is little changed from when I last visited it in September. Granted, FCEL stock has plunged about 31% since FuelCell’s last quarterly report, but the stock’s potential post-earnings direction is just as muddy.
One thing is for certain, however: FCEL stock is in for a potentially sharp move once FuelCell Energy releases its fourth-quarter report.
Click to Enlarge Specifically, December option implieds are pricing in a potential post-earnings move of more than 16.5%. This places the upper bound near $1.75, while the lower bound lies at $1.25.
Technically speaking, a post-earnings rally to the $1.75 area would leave FCEL stock well short of reclaiming its 50-day moving average and growing technical resistance at $1.80. A drop to $1.25, however, would send FCEL into fresh annual-low territory, with follow-through selling potentially threatening penny-stock status.
FCEL stock has plenty of potential drivers for a move in either direction. On one hand, the shares remain lightly covered by the brokerage community, with Thomson/First Call reporting just two “buys” and two “hold” ratings. The lack of “sells” leaves room for potential downgrades, while the overall lack of coverage leaves FuelCell open to attracting more analyst attention.
Still, the lofty consensus 12-month price-target of $3 – a premium of more than 82% to yesterday’s close – has “potential target cuts” written all over it.
Options traders are also leaning heavily toward the bullish camp. The December put/call open interest ratio for FCEL stock arrives at 0.26, with call open interest nearly quintupling put open interest for the front-month series of options. There are two factors that limit takeaways from this bullish reading, however.
First, with FCEL trading just above penny-stock territory, there are limited strikes and strategies available for options traders. Second, some 33.3 million shares of FCEL stock are currently sold short, representing a sizeable 14.4% of the stock’s total float. Since short sellers often buy calls as a way to hedge their positions, much of FCEL’s call open interest might be tied up as short hedges. That said, a large enough move from the stock could still create a squeeze situation.
Overall, implied volatility remains relatively low for FCEL compared to historical volatility ahead of the company’s quarterly earnings report.
Since it worked so well last quarter, traders may want to once again consider a straddle position on FCEL.
Straddle on FCEL Stock
At the close of trading on Wednesday, the Dec. $1.50 straddle was offered at 25 cents, or $25 per pair of contracts. Breakeven for this trade lies at $1.75 on the upside and at $1.25 on the downside. This trade will hit a double at $2 on the upside and $1 on the downside.
FCEL stock can be quite volatile, so be sure to set limit orders at your desired profit target to ensure you don’t miss out on taking profits.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
