SolarCity Corp Earnings: Make a Killing in a Volatile SCTY

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SolarCity Corp (SCTY) faces a wall of bearish sentiment heading into the earnings confessional next week, as Wall Street looks for impressive revenue growth with earnings mired in the red.

SolarCity Corp Earnings: Make a Killing in a Volatile SCTYWhat’s more, depressed energy prices, slowing demand and a mix of troublesome government subsidies/regulations could significantly impact guidance.

The SCTY stock price could be quite volatile following earnings, opening a prime options strategy for just such situations. But before we look at trades, let’s look at a few drivers.

The Street expects SolarCity to lose $2.59 per share, up significantly from a loss of $1.33 per share last year, on revenue of $105.62 million, a 47% surge.

There currently isn’t a whisper number on SolarCity’s fourth-quarter figure, but the brokerage bunch clearly has high hopes. Thomson First Call attributes 13 buy ratings, five holds and no sell ratings to the stock.

The 12-month consensus price target of $64.50 represents a very lofty premium of 118% to Thursday’s close. Clearly there’s plenty of room for some of this bullish sentiment to blow off.

SolarCity stock has also become an easy target for short sellers, with roughly 23.8 million shares currently sold short. This wealth of short positions accounts for nearly 43% of SCTY’s total float, or shares available for public trading. Where analyst downgrades could spark a selloff, this sizable short position could fuel a significant’ short squeeze rally if SolarCity can wow the Street next week.

02-05-2016 SCTY
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If short sellers are worried, it isn’t showing up in the options activity. Currently, the February put-call open interest ratio for SCTY rests at 1.98, with puts nearly doubling calls among options set to expire within the next month.

This ratio dips to 1.16 in the weekly Feb. 12 series, but still indicates a heavy degree of bearish sentiment ahead of next week’s report.

Overall, weekly Feb. 12 series implieds are pricing in a potential post-earnings move of more than 18% for SolarCity stock, placing the upper bound north of $34 and the lower bound south of $24.

A rally would leave SCTY short of its 20-day moving average, while a decline would push the stock to within reach of a fresh 52-week low. Keep in mind that several factors (analyst ratings, short interest) could push SolarCity stock beyond the expected move in the weeks following earnings.

2 Trades for SCTY Stock

Straddle: Fair warning. Trading SolarCity options ahead of earnings is not for the faint of heart. The stock is expected to move 18%, and implieds are relatively high at the moment. But if you’ve got the fortitude, enter a straddle.

A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put in an attempt to take advantage of a greater-than-expected move from the underlying stock. A straddle is a bet that the company is going to blow out earnings and guide strong, or a bet that it will confirm the bearishness and bring on a flood of sell-on-the-news activity.

At last check, the Feb. 19 series straddle was offered at $6.06, or $606 per pair of contracts. Breakeven for this trade lies at $35.06 on the upside and at $22.94 on the downside. As you can see, both of these levels are beyond what weekly Feb 12 series implieds are pricing in, but if analysts or short sellers get involved, either target could be easily surpassed.

Put Spread: Another way to trade SolarCity ahead of earnings is to side with the wealth of bearish sentiment currently leveled against the stock. Traders siding with the bears might want to consider a Feb. 19 series $25/$26 bear put spread.

At last check, this spread was offered at 23 cents, or $23 per pair of contracts. Breakeven lies at $25.77, while a maximum profit of 77 cents, or $77 per pair of contracts, is possible if SCTY stock closes at or below $25 when February options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/scty-stock-price-solarcity-options/.

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