We recently laid out the bearish case for Plug Power (PLUG), an alternative energy technology name, and today we’ve got a put option trade to ride that downtrend.
Don’t let a quick price pop Tuesday on the back of increased Wal-Mart (WMT) orders fool you. It’s true that Plug Power is an interesting company that has risen from being a penny stock to more than $11 per share over the last year. The firm spiked on speculation about demand for its fuel-cell products from companies like Wal-Mart and Ace Hardware.
But demand has unfortunately been underwhelming, and the company’s underlying fundamentals have continued to be weak. Analysts should be watching the company’s cash-conversion-cycle as earnings approaches and a few have been. The bottom line is that operational liquidity is moving in the wrong direction. The company has taken some big risks over the last two years, as it raised capital and diluted shareholders. If it can’t back that up with real earnings growth, then a return to penny-stock status in the near term seems likely.
We recommend entering the Plug Power trade before earnings are released in August. We don’t have a firm date for that release yet but expect it to happen within a week of the Aug. 13. The stock already has a lot of bearish interest, and that has inflated the price of the puts a little. We feel that it is still at an acceptable level, but, because this is a small stock, the use of a limit order is imperative.
Use a limit order to ‘buy to open’ the PLUG October 5.50 Puts for a maximum price of $1.10.
The recent jubilation in Plug Power should offer traders an opportunity to get positioned in the puts at or below that price limit, so take advantage of the discount.
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