SolarCity Corp (SCTY) dealt a massive blow to stockholders on Wednesday.
While the company’s earnings report was largely in line with the company’s own estimates, fourth-quarter installations and first-quarter guidance were exceedingly disappointing.
But while SCTY stock’s 29% plunge was anathema for stockholders, it was ambrosia for options traders with a stomach for risk.
When I previewed potential options trading ideas for SolarCity’s earnings last week, I suggested taking a look at the February $29 straddle or the February $25/$26 bear put spread. SCTY option implieds were pricing in a potential move of about 18%, but with the stock’s volatile history, and bearish headwinds from broader market forces, the move would most certainly be greater, especially to the downside.
If you were brave enough to jump in on either of these trading ideas, you should probably consider exiting the position now — especially the put spread, as it has hit its maximum return. If the risk was too high for your portfolio, or if you just missed the opportunity, SCTY is still a prime options trading candidate post earnings. But the situation may not be as bearish now as you might expect.
From a sentiment perspective, the situation has only become more bearish compared with a week ago. Stifel Nicolaus and Robert W. Baird cut their price targets, while Roth Capital downgraded the stock to “neutral” from “buy” and slashed its target to $19 per share from $65.
However, the consensus price target from Thomson/First Call of $64.50 still represents a massive premium of about 250%, while 13 of the 18 analysts covering SCTY rate it a buy or better.
On the options front, puts have taken over SCTY’s near-term outlook. During the past week, the February/March put/call open interest ratio has climbed to a perch of 2.08, with puts doubling calls among near-term options. Falling back to the March series, the put/call open interest ratio balloons to 2.9, with puts nearly tripling calls.
Click to Enlarge On a related note, March implieds are still pricing in a potentially massive move for SCTY, with premiums reflecting a move in excess of 20% by the time March options expire on the 18th. Honestly, with earnings already out of the way, it’s hard to see the drivers for a move of that magnitude.
In other words, SCTY options appear to be considerably overpriced at the moment.
When it comes down to it, SolarCity’s fourth-quarter results weren’t extremely bad for the company. Operating costs were below expectations, installation costs had declined, and prices were slightly higher overall. In normal market conditions, I would expect SCTY to drift higher following such a massive drop in the shares. One might even consider SCTY a “value buy” at these levels.
2 Trades for SCTY Stock
Put Sell: These are not normal market conditions, however. Nor are SCTY’s premiums normal for a post-earnings situation. Because of this, exercising caution with SCTY options is the best bet. With elevated premiums and Wall Street awash in red, selling deep out-of-the-money puts might be a SCTY options traders best bet.
If you’re up for a bit of risk, the March $15 put sell has a good shot at finishing out of the money. At last check, this put was at $1.52, or $152 per contract. The upside to this put sell strategy is that you keep the premium as long as SCTY stock closes above $15 when March options expire on March 18. The downside is that should SCTY trade below $15 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $15 per share.
Call Spread: If you’re slightly more daring and want to take your chances that SCTY will recover from oversold conditions once Wall Street takes a closer look at the stock, a March $19/$20 bull call spread has potential for a solid return.
At last check, this spread was offered at 34 cents, or $34 per pair of contracts. Breakeven lies at $19.34, while a maximum profit of 66 cents, or $66 per pair of contracts, is possible if SCTY trades at or above $20 when March options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
