SolarCity Corp: Power Returns to SCTY Stock

The market melt-up is seeping into every nook and cranny on the Street. Momentum mavens will be happy to note that volatile SolarCity Corp (SCTY) is finally seeing some love. Monday’s trading session delivered a 4% gain to the solar stock on heavy volume. Buyers wanted in and they weren’t afraid to pay up throughout the day.

Since getting poleaxed on dismal earnings in February on record-breaking volume, SCTY has quietly carved out a nice little uptrend carrying the stock back above its 20- and 50-day moving averages.

The oft-watched 200-day average is beckoning, and given the type of power SolarCity possesses when it starts to ramp, the $38.60 level isn’t an unrealistic target in the coming weeks.

Volume patterns this month are also buttressing the bulls’ bid to return SolarCity stock to its former glory. We’ve seen three accumulation days (yesterday’s included) over the past two weeks, which show institutional accumulation backing the rebound.

Click to Enlarge
Source: ThinkorSwim

I previously called SCTY volatile. To put context around that, consider the Historical Volatility indicator included in the lower panel of the accompanying chart.

The 30-day HV reading comes in at 60% these days, and that’s the lower end of its range. Heck, it was as high as 140% in February.

In contrast, the 30-day HV of the S&P 500 is currently languishing at a dismal 10%. So, yeah, SCTY volatility is some six times higher than the broad market. It’s a mover all right.

SCTY Call Spreads Offer Shining Returns

Thanks to its amped up volatility, option premiums on SolarCity are juiced, which suggests a call spread is a better alternative to buying calls outright.

Buy the July $31/$36 call spread for $1.42. The bull call spread consists of buying to open the July $31 call while selling to open the $36 call. The initial debit of $1.42 represents the max risk in the trade and will be lost if SolarCity stock sits below $31 at expiration.

The max reward is limited to the distance between strikes minus the net debit, or $3.58, and will be captured if SCTY can rise above $36 by expiration.

By risking $1.42 to score $3.58, the spread offers a mouth watering 252% return.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

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