First Solar, Inc. (NASDAQ:FSLR) reported earnings and the stock is consequently down 7% on the headline. This is an opportunity to go long for the mid-term. The macroeconomic picture remains favorable to stock market bulls and the solar industry, including First Solar stock, is an important part of it.
Fundamentally, FSLR is the kind of stock that causes me to run the other way. It’s an industry that should be a slam dunk winner. Yet, with all the regulatory advantages they still can’t make money. There is a saving grace here, however. That is, its price-book is just above 1, so there is overall value in the company.
Today’s bullish trade bets on the price action, not the operational value. First Solar stock has survived many disaster headlines and this one, too, shall pass.
First Solar is a momentum stock after all. When it moves in a direction it does it fast and long, making it hard to pick perfect entry points. When it falls, it looks like it’s going into an abyss leaving many investors on the sidelines. That’s when I use options. There I can build buffer zones to create room for error.
The stock is falling on the earnings headline. They beat expectations and guidance was okay yet investors saw something they hated. This stock market is on pins and needles and small issues seem like mountains these days. So until this passes, traders will rarely find the perfect entry points they’re looking for. For now, this is simply the price action.
First Solar Stock Technicals
Technically, FSLR stock has risk below but especially if it continues to fall. Below $60 per share, it could invite momentum sellers to $52.50. This is not a forecast but a potential scenario that could unfold. This stock market is currently nervous so if we get another whoosh lower it may make it more difficult for FSLR to find its footing.
Nevertheless, solar energy will be a necessity in our future. We are using more energy than before. Tesla Inc (NASDAQ:TSLA) is making the electric auto mainstream, so this will shift more attention to batteries and solar is an integral part of that circle.
Click to Enlarge Experts on Wall Street are in a holding pattern on FSLR so that lessens the likelihood of a deluge of downgrades. The stock is trading below the average price target so there is no incentive to change those either.
The Bet: Sell FSLR May $47.50 put and collect $1 per contract to open. I have a 85% theoretical certainty that I retain maximum gains. Otherwise, I will accumulate losses below $46.50.
Selling naked puts carries big risk especially for a stock as frothy as FSLR. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the FSLR May $50/$47.50 bull put spread, which has about the same odds of winning and would yield 15% on risk. Compare this with risking $62 per share here and, without any room for error, expecting a rally profit.
Bottom Line on First Solar Stock
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for FSLR stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.