It’s summer, but solar stocks are less than hot right now. Bearish investors looking for an efficient way to boost profits and limit risk can find an attractive opportunity in SolarCity (SCTY) stock using a bear put spread.
Solar plays like SolarCity stock officially lost the last bit of their sizzle last month. The alternative energy space’s lone holdout Sunedison (SUNE) got torched after succumbing to investor disapproval of the company’s proposed acquisition of Vivint Solar (VSLR) — followed by disappointment over a wider-than-expected earnings loss a couple weeks later.
But Elon Musk’s SolarCity, along with top players First Solar (FSLR), SunPower (SPWR) and Canadian Solar (CSIQ) were already sending out smoke signals of potential danger since before summer got officially underway. As we move through August and into the perennially bearish month of September, bulls still aren’t out of the woods.
For SolarCity’s part, pressure on shareholders in the past couple months could have to do with the company’s growing debt load and fear that projects will be put on the back burner as investors worry about slowing economic growth and impact on future opportunities.
SCTY Weekly Stock Chart
Continued pressure in SolarCity stock may also have to do with its price chart. The weekly view of SolarCity stock depicts a large bearish descending triangle that has developed since shares of SCTY peaked back in early 2014.
Over the past several trading sessions, SolarCity stock has been consolidating near key pattern support. After three tests of lateral support that have held SolarCity stock’s 50% and a shorter-term 62% Fibonacci retracement levels, the current fourth test should result in shares breaking lower.
With the entire group now in downtrends in bear market territory, the bearish triangle could send shares down another $20 or so and to a test of the smaller Fibonacci low near $28 in SolarCity stock.
First things first, though: A breakdown from the triangle should lead to a rather quick and powerful move to the $39 to $40 area, which would represent a nice opportunity to profit and reposition for the potential lower price target.
SCTY Bear Vertical Strategy
If you want to capitalize on a sizable move lower in SCTY, a bear vertical is a great way to participate directionally while vastly reducing position risk.
In checking the options board in SolarCity stock, one standout is the October $50/$42 put spread priced for $3 or better. The max profits is $5 if SCTY stock is below $42, which means a potential return on investment of 167%.
As $42 is 5% above the 62% Fibonacci level described above, a profit adjustment is advisable if SolarCity stock tests the $40 to $42 area.
Reducing one’s position size or rolling out into another lower and further out vertical are two ways to continue holding a bearish position in SolarCity stock with a much stronger risk-to-reward profile than simply holding and hoping as good profits build on paper.
And if SolarCity stock fails to cooperate and instead moves higher? With starting directional risk of around 30 cents for a $1 move in SolarCity stock, a trader long this bearish spread could reasonably minimize by roughly 50% to 60% using a 13% stop loss above $55.60.
While this stop price does mean the bearish pattern in SolarCity stock is still technically intact, it’s loose enough in our estimate to avoid getting hit, while preventing a larger burn.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
