SolarCity (SCTY) has been hot, hot, hot lately — and in the process is offering another opportunity for bears to reload in SCTY stock at opportune prices on and off the chart.
For readers unfamiliar with residential solar panel installer SolarCity, SCTY stock is among the markets more heavily-shorted names. As of mid-November, approximately 50% of SCTY’s float was borrowed or short.
A good part of the uptick in bearish interest in SCTY stock this year is undoubtedly attributed to famed short-seller and hedge fund manager Jim Chanos who gained notoriety with his bearish short position in Enron back in 2002.
Now, Chanos’ Kynikos Associates hedge fund took a short stake in SCTY stock and doubled down on his position earlier this year.
Perhaps unwittingly, Chanos also took on the role of grand emcee for SCTY stock bears. Back in late August he likened SolarCity’s business to that of a subprime lender, noting that it’s burning through massive cash, has heavy debt and a negative EV/EBITDA position — factors that are harmful to the bullish case.
SCTY Stock Weekly Chart
This market strategist is no stranger to embracing the bear argument against SCTY stock. Most recently, I wrote an article from Sept. 10 detailing a bear put spread that delivered a quick double or better in a bit more than two weeks.
Currently, shares of SCTY have rallied aggressively in the past few weeks. The price action has put SCTY stock into zone resistance, which is a nice counter-trend or fade entry for bearish positioning.
As depicted in the weekly chart of SCTY stock, shares are in a testing position of the 38% to 50% levels from the July pivot high to November low. SolarCity has also filled a bearish, daily price gap (horizontal line) and is nearing its down-sloping upper channel line.
Solarcity stock has rallied aggressively by about 55% into resistance since the November low — price action likely fueled by bearish shorts wanting to take profits. SCTY stock now (once again) deserves the benefit of the doubt — from the bearish perspective!
SCTY Stock Bear Put Spread Strategy
A check of the SCTY stock’s volatility levels shows premiums rising, especially on the high end of its trading range. The situation makes a bearish vertical position attractive.
A vertical in SolarCity stock enables the trader to reduce volatility risk in owning an option. The spread also manages time decay more effectively when compared to similar long bearish positions. And all the while, the trader is able to short the stock while maintain limited risk.
With SCTY stock finishing at $36.10 on Monday, the January $37/$32 put spread for up to $2.50 is attractive.
This vertical allows the trader to maintain a directionally short position in SCTY stock with a max reward of $2.50 if SolarCity trades below $32 at expiration. Thus, the trader has the potential to make a return of 100% on their investment on a move of just 11% lower.
And should SCTY stock continue to move higher and to the detriment of this spread, having a limited risk is a very attractive position in a name that is still heavily-shorted and prone to bear market rallies.
Note: Current Kynikos position in shares of SolarCity are not known.
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
