For best-in-breed First Solar, Inc. (NASDAQ:FSLR) conditions off and on the chart are feeling the chill in the early dog days of summer. But before investors’ hit the panic button in FSLR stock, a bull call spread should provide sizzling profits in the trading account if history is any sort of indicator. Let me explain.
FSLR stock has moved from super-hot through the spring of 2018 to downright ice cold in early June, with shares tumbling nearly 14% in three sessions. Much of the blame can be attributed to a weakened solar market courtesy of China.
Last week the Chinese government caught investors by surprise by reducing the number of utility-scale solar project permits it issues, as well as subsidies for utilities providing solar for their customers. But what’s that have to do with First Solar? In a direct sense, not a lot.
The potential problem and reason behind a Merrill Lynch downgrade on FSLR stock to neutral and price target cut from $83 to $63 has to do with overcapacity of solar modules in China flooding the U.S. market. Despite taxes and tariffs imposed on foreign competition, overseas outfits still have a pricing advantage over First Solar and the ability to pressure its best-in-breed financial cushion.
FSLR Stock Daily Chart
So, are Merrill Lynch and other fearful investors correct in jumping out of FSLR? That could be the case. Shares have broken key channel and 200-day simple moving average support over the past couple sessions on unusually heavy volume, but not so extreme as to label it as a capitulation. Those are signs which could point to more downside on the way.
Personally, though, I’d refrain from joining the panic right now.
Bottom line, FSLR is oversold short-term, and in the process it has put together a fairly healthy and ordinary corrective decline of nearly 30%. Thus, while the move is unnerving to look at, it’s during instances like this that investors are typically rewarded for buying when everyone is selling with overly emphatic conviction.
What if investors still aren’t convinced of FSLR stock’s longer-term success? This strategist believes better opportunities to reduce or exit a long position over the next week or two on a bounce into overhead resistance are likely to come into play.
FSLR Stock Bull Call Spread Strategy
I believe that FSLR stock is oversold and has established a historically nice-looking corrective move, but I’m also always keen to reduce and limit risk in the event I’m wrong. Therefore, approaching shares with a bullish out-of-the-money call spread is a prudent strategy.
Reviewing First Solar’s options board and with shares at $53.31, the July $62.50/$67.50 call combination for $1.05 or better is a favored vertical of this type. By positioning in July, this spread is allowing time for the oversold condition to work itself off and for FSLR stock to move higher, even if the absolute low isn’t in just yet. And if shares don’t cooperate, exposure is limited to the debit paid up front.
Ultimately, this kind of position requires FSLR stock to rally in order to profit at expiration. If a price swing higher is large enough to take shares above $67.50, an unadjusted profit of $3.95 would be captured.
Alternatively, additional risk management during the life of the spread such as trimming one’s stake on a double or adjusting into a low-to-no-risk butterfly or other vertical is always a welcome opportunity in this strategist’s playbook.
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.