It might just be lights out for SolarCity (SCTY). The momentum darling plunged 7.7% yesterday on heavy volume (and is down another 2%-plus today), taking out a serious support level in the process.
Not that weakness is anything new for SolarCity stock. The denizens of Wall Street have already delivered a 50% haircut to the solar energy provider from its early 2014 highs. But if yesterday’s downdraft is any indication, it appears the pain is about to be kicked up a notch.
All you SCTY shareholders best buckle up.
Click to Enlarge
The accompanying SCTY stock price chart reveals the seriousness of Wednesday’s breakdown. The $46 level has been a battleground for SolarCity stock over the years.
To the bulls’ credit, each and every test of this support zone has led to a rebound. Yes, the late August China crash undercut this floor, but we recovered swiftly.
But this time looks different. SCTY sliced through support on its own accord.
The logical target for SolarCity’s current downdraft is $35. That’s where last month’s crash finally rebounded, and I suspect a retest is in the cards.
Join SCTY Bears With Put Spreads
One of the aggressive — not to mention profitable — avenues for capitalizing on continued weakness in SolarCity stock is to buy a bear put spread. The recent uptick in volatility has inflated option premiums, making a long put too expensive.
Since the bear put spread consists of both buying and selling a put, it drastically reduces the risk.
Buy the Nov $40/$35 put spread for $1.35. The position will deliver rewards aplenty if SolarCity stock returns to the $35 zone anytime over the next two months.
The max loss is limited to the initial $1.35 debit and will be forfeited if SCTY remains above $40. The max gain is limited to the distance between strikes minus the net debit, or $3.65, and will be captured if SolarCity stock can fall below $35 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
