Sell Sunshine With Shorts on Solar Stocks

by Michael Shulman | May 27, 2011 10:52 am

Memorial Day is upon us — the days get longer, the sun gets brighter. And that is where options trading investors need to look for their next position. The sun.

The sun’s movements are predicted with complete certainty. Juxtapose that against the uncertainty everywhere you look – Greece, the US economy, the debt crisis, violence in the Middle East, and a slowing China.

There is, however, certainty that government spending in the developed world is going to be pared back. Discretionary spending will be cut first — and that means the large subsidies to support sales of solar energy systems. Solar companies have benefited greatly from these subsidies but are now being hit hard by cutbacks and planned cutbacks.

Yesterday Suntech Power (NYSE: STP[1]), a put position in my service, Michael Shulman’s Short Side Trader[2], posted profits of just 17 cents a share compared with estimates of 36 cents, and reduced its forecasts going forward. A few weeks back Yingli Green Energy (NYSE: YGE[3]) said it too would take some hits and the explicit reason was a sharp slowdown in Europe.

Find more option analysis and trading ideas at Options Trading Strategies[4].

What to do? First, forget the noise about solar this and solar that, the future this and future that. Without government subsidies solar systems are not economical for many potential customers, from individuals to power companies. Natural gas will need to at least double from its current price of $4 and change per-million BTU for solar and wind to be competitive.

Conclusion: a longer-term, short-side trade.

The 800-pound gorilla in the market is First Solar (NASDAQ: FSLR[5]). Take a look at a longer term position — there are LEAP options, but nothing earlier than October – because pricing will be driven by earnings that are in turn driven by the reduction or phase out of government subsidies. I always prefer a strike that is out of the money. I would also wait a bit, the news from Suntech has produced some short covering in all the solar stocks so wait for the stocks to settle down and roll over again before putting any money to work.

Michael Shulman uses simple trading tactics to make solid, profitable investments in falling stocks in his Short-Side Trader[6] service.

  1. STP:
  2. Michael Shulman’s Short Side Trader:
  3. YGE:
  4. Options Trading Strategies:
  5. FSLR:
  6. Short-Side Trader:

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