Many on Wall Street like to say “the trend is your friend.” But when it comes to First Solar, Inc. (NASDAQ:FSLR), other price patterns and a simple appreciation for risk versus reward dictates that today’s investors buy more smartly with a modified fence strategy on FSLR stock. Let me explain.
It has been the best of times and the worst of times all wrapped up in one over the past couple sessions in FSLR stock. Immediately following last week’s earnings report, an easy bottom-line beat and overall upbeat call from management brought out the “champagne and caviar dreams” crowd, with shares of First Solar soaring to fresh seven-year highs.
And then came Monday.
Monday ushered in a hangover-style reply to Friday’s bullish initial response to FSLR stock’s Q1 report. With little in the way of fresh news and, in fact, analysts at UBS actually reaffirming their buy recommendation and upping First Solar stock’s price target from $81 to $94, the decline of 9% was all the more dazzling.
Nevertheless, for the moment the abrupt about-face in FSLR can rightfully be chalked up to simple, albeit volatile and aggressive, profit-taking given the year shares have enjoyed. Of course and as we’ll see below, bearish traders may call the price action something else on the price chart. And they may be right.
But then again, maybe they won’t.
FSLR Stock Weekly Chart
Looking at the weekly chart of FSLR stock over the past year, there’s little doubt shares are in an uptrend. There are gains in excess of 200% to confirm that truth. But Monday’s price drop through the prior week’s doji decision candle is concerning. That candle formed around the prior high water mark near $75 — and with the bearish signal in place, First Solar shares should be treated more cautiously right now.
Bottom line, even if you’re bullish on FSLR stock, profit-taking and even corrections of up to 30% are a normal part of successful investing after a sizable bull run like First Solar’s. And as the current weak price action suggests, First Solar is beginning down that path. Beyond that truth, it’s all conjecture, though with options market we can remove a great deal of that uncertainty and position more smartly.
FSLR Stock Modified Bullish Fence
Based on our cautious outlook, it stands to reason buying carries with it increased risk in the near-term. But by using FSLR options, bullish traders can position defensively without risking the possibility of being left on the sidelines, in the event our technical forecast is simply off-the-mark.
One strategy which looks to capitalize on this type of positioning is a modified fence strategy. A modified fence combination purchases a call vertical and sells a put vertical in the same contract month to finance all or part of the cost of the entire position.
The money maker, in the event we’re wrong about FSLR’s short-term direction is for the call spread to go fully in-the-money with FSLR stock rallying above the purchased vertical. Defensively, as this position minimizes risk relative to shares, the modified fence can work well for investors’ looking to accumulate First Solar on price weakness and with less exposure.
Reviewing FSLR’s options, one favored combination that’s on the radar is buying the July $75/$80 call spread and selling the July $65/$60 put spread. With First Solar shares at $70.91 the modified fence is trading for a slight debit of 10 to 15 cents.
This position allows for a decent amount of time for FSLR to shake off the current weakness and rally. If this was to occur and shares finished above $80 at expiration, a profit of nearly $5 would be realized.
Alternatively, if First Solar declines, this spread trader has virtually no exposure for nearly $6 below the current share price, as the bull put spread’s short contract rests on the $65 strike. As this risk amounts to a correction of 20% from last week’s high of $81.72, that’s not a bad spot to begin getting long FSLR, right?
Okay, some readers might be thinking, 20% isn’t quite the “30%” correction figure noted above. That’s true. However, trading charts isn’t about perfection, it’s about positioning with favorable odds. And with two-thirds of our idealized correction captured, the spread risk contained to about 8% of owning FSLR stock and getting long near the most recent key low within the uptrend — there’s plenty of reasons to see the benefits in this type position.
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.