September is off to a volatile and rough start and living up to its reputation for bearish behavior. For investors wanting to participate, a long put vertical in SolarCity (SCTY) is a position that’s ready, yet again, to scorch bulls.
Back on Aug. 20, this markets strategist made the prescient case for shorting SCTY stock via a bear put spread. Concerns over SolarCity’s growing debt load and fears that projects could simply dry up as part of an economic slowdown supported the bearish stance from different sides of the same coin.
Building the bear case in a more subtle way based on investor reaction, a very bullish-sounding “outperform” initiation and $66 target for SCTY stock from Oppenheimer just yesterday failed to support the stock.
On the heels of the analyst call, shares of SCTY stock nonetheless finished aggressively lower by 6% Wednesday, falling much sharper than the broader market.
Another recent development that we see as a forced defensive play: SolarCity chairman Elon Musk recently announced that he bought $5 million worth of SCTY stock near $40 as shares tumbled during the Aug. 24 debacle in the broader market.
The “bullish” purchase has so far amounted to being a terrific trade. But for billionaire Musk, the position could easily and quite affordably be a simple bluff to get public support and famed short-seller James Chanos to fold his short position in SCTY stock.
The hedge fund manager disclosed on Aug. 21 that he was short SCTY stock, likening SolarCity to a subprime lender, and despite Musk’s high profile purchase, Chanos reiterated the position on CNBC yesterday.
Between potential existing problems and the more recent developments in SolarCity, SCTY stock still looks like a short without even looking at a chart. Incidentally, the chart only reinforces our bearish position.
SCTY Weekly Stock Chart
Shares of SCTY stock are once again situated at the support line of a large and bearish descending triangle pattern. On Aug. 20 we correctly anticipated technical failure and strongly suspect this price level will fail again.
Previously, we discussed SCTY stock falling to $39 or $40, and as low as $28 in the longer term. In our opinion, bulls haven’t had sufficient time or price punishment to truly capitulate, and we anticipate a more severe bearish move in SCTY is still forthcoming.
Adding to the bearish narrative, SCTY stock managed to reverse three daily doji, decision-style candlesticks on heavier volume to the downside on Wednesday.
The bearish distribution also has SCTY stock reversing below a newly-minted death cross formed by the 50-day simple moving average crossing below the 200-day simple moving average. The path of least resistance still looks lower for SCTY stock.
SCTY Bear Vertical Strategy
Looking at the options board in SCTY stock, the October $47/$42 put spread for $1.70 debit or lower is attractive. The price is based on the fair or mid-market value of $1.60 from Wednesday’s close and adding 10 cents for good measure to better ensure a fill at a limit price that still makes sense.
Max profit for this spread is the difference between strike prices of $5 minus the debit paid, which based on $1.70 results is $3.30 — or a potential return of nearly 200% if SCTY stock sits below $42 at expiration.
Should SCTY stock move favorably lower in a hurry, our suggested strategy would be to roll the vertical down or book partial profits. These type adjustments allow traders to reduce risk while remaining positioned for profits on a continuation of trend. Now that’s a hot move with no “differentiated financing” necessary!
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
