If there was ever a reason to believe bullish price action precedes enticing headline and analyst RSVPs, look no further than First Solar, Inc. (NASDAQ:FSLR). Then do yourself the favor and look to FSLR stock, but trade a bull call spread for sizzling profits. Let me explain.
A few weeks back I discussed buying into a FSLR stock downgrade as it looked obvious investors weren’t buying what analysts were selling. It was the latest in a series of bullish pieces with a contrarian lean on First Solar and the solar sector.
At the same time, skeptical bears have continued to warn, with two or maybe three items standing out as attempts to foil FSLR stock bulls. First, there was the Paris climate agreement which saw one of the world’s largest carbon emitter pull out as the deal “will harm” American jobs according to President Donald Trump. I’m guessing those are coal jobs?
Oil has also traded aggressively lower over the period. For its part the United States Oil Fund LP (ETF) (NYSEARCA:USO) has tumbled more than 15% to one-year lows last week. That of course is always good for bears trying to use cheaper energy prices as a reason to pull the plug on solar and FSLR stock.
Third and most recently, President Trump reaffirmed last week that one of his hot ticket items, a U.S./Mexico wall, was still going to be built. But instead of the campaign promise Mexico would foot the bill, now apparently Mother Nature will provide the border a “solar wall” and it will pay for itself.
On the surface it sounds great for a player like First Solar, but given Trump’s ever-worsening record of verbal retractions, delays, broken promises and the likes, FSLR stock and other solar plays must be shorts, right?
As well and in this instance, there could be some math which doesn’t quite add up with the solar wall. That’s according to long-time solar bear Gordon Johnson of Axiom Capital Management. Short solar and FSLR stock, right!!??
Yet and in spite of all the continued negativity and lack of real deals worthy of supporting FSLR stock, shares are sizzling. Bottom line, FSLR is up about 24% for the year so far and its leading price action has only strengthened as it has moved higher into bull territory.
FSLR Stock Daily Chart
Since last discussing FSLR stock and as denoted by the yellow highlight, shares have continued to hit fresh year-to-highs after establishing a hammer low test of the 200-day simple moving average. That’s nice, right?
The answer is yes, but at the same time, it hasn’t always been puppy dogs and rainbows either for First Solar bulls.
As the FSLR chart also reflects, the overall bullish price action has had its share of volatility and the type sometimes difficult to sit through. Nevertheless, a bullish chart has improved for the period and still looks good for even higher levels.
Near-term, a gap fill and sideways Bollinger Band might act to stall FSLR stock’s rally this past week. Ultimately though, the $44 area is where some more meaningful resistance lines and maybe the potential for overbought conditions might unite and cause reason for a technical review.
FSLR Stock Adjustable Bull Call Spread Strategy
Given the overall bullish view for FSLR stock, but appreciative conditions, especially in a volatile stock, can change rapidly, using a bull call spread to start a position right now makes sense on more than a couple levels.
In reviewing the First Solar options board, the Sep $42.50/$45 call spread is attractive. With FSLR trading at $40.74 the bullish vertical is priced for a debit of 77 cents.
What does this spread offer traders? First, risk is defined by the purchase price so the max loss on the position is the equivalent of 2% of FSLR stock. With nearly a three-month holding period, that’s more than a bit reasonable and of likely benefit in the event another volatile episode of pressure occurs within First Solar’s uptrend.
Second, were FSLR another bout of price pressure to enter the picture, with minimal position risk and time on the calendar, selling a bull put spread at more opportune strike prices within the existing trend in order to offset the cost of the call vertical, might be considered.
Lastly, if FSLR is able to rally 11% into expiration, above $45 the spread expands to $2.50 for a profit of $1.73. That’s a return in excess of 210%. Having said that, adjusting during the life of the spread if, and as discussed above, FSLR challenged the $44 area in an aggressive manner, would certainly be worthy of our consideration.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
