Shares of SolarCity Corp (SCTY) have been moving up sharply after the drubbing SCTY stock took on weak guidance issued by the company. SCTY has now completely closed the gap on the chart following the lowered guidance issuance.
Click to Enlarge I look for SolarCity stock to run into some resistance and retrace some of those gains over the coming few weeks.
SCTY is getting overbought from a technical perspective, with the nine-day RSI reading approaching 70. The last time SolarCity had a similar reading was in mid-December of last year, which marked a significant high in the share price. I expect a similar pattern here, with shares of SCTY putting in a near-term high.
Click to Enlarge There is significant technical resistance at the $28 level for SCTY, with major resistance looming overhead at the $37 level as well.
SolarCity stock is normally correlated to the price of oil, but has been a dramatic underperformer since the lowered guidance was issued. A leveling off in the rally in oil should also provide a further headwind for SCTY stock. This is another decided negative for the short-term outlook for the SCTY stock price.
The company is still burning cash at an alarming rate of nearly $500 million per quarter, according to noted short seller Jim Chanos. He also hints that the company is nothing more than a subprime financing company.
SCTY Stock Trade
Click to Enlarge Implied volatility (IV) is still elevated in SolarCity, so I favor option selling strategies. With IV over 100%, premiums are indeed rich, and I can position well out of the money and still receive a decent credit with a very nice cushion.
Specifically, I am looking to sell the April $37 calls and buy the April $39 calls for a 32 cent net credit. The short $37 strike is positioned at the major resistance level of $37 and also 41% above the current closing price of $26.15.
The maximum gain on the trade is $32 per spread with a maximum risk of $168 per spread. Return on risk is 19%. I would look to close out the position on a meaningful move past $37, while hoping to let the position expire and keep the initial credit if SCTY stock remains well behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
