3 Solar Stocks to Trade While They Continue to Heat Up

solar stocks - 3 Solar Stocks to Trade While They Continue to Heat Up

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Wall Street has peered into its crystal ball and loves what it sees for solar stocks under a Joe Biden presidency. The industry was already powering higher, but the uptrend went into overdrive following November’s election. And, it certainly doesn’t hurt that democrats swept both of Georgia’s Senate seats, paving the way for easier passage of any solar-friendly legislation. All of this has helped place solar stocks back in the spotlight lately.

But politics and future earnings growth aside, the technicals for solar stocks are beautiful and demand all chart watchers’ attention. The profit-taking we saw last Friday pulled the industry trend I track to its rising 20-day moving average. It’s the first such dip we’ve seen in about six weeks and marks an easy buy-the-dip opportunity.

I searched all the liquid solar stocks on my watchlist and found quality setups in the following three stocks:

  • Canadian Solar (NASDAQ:CSIQ)
  • SunPower (NASDAQ:SPWR)

After a brief inspection of their price action, I’ll suggest an options trade to play.

Solar Stocks to Trade: Solar ETF (TAN)

Solar ETF (TAN) stock chart with bull retracement

Source: The thinkorswim® platform from TD Ameritrade

This first pick isn’t a stock, but an exchange-traded fund. That doesn’t make it any less appealing, however. After all, the low-hanging fruit for anyone trying to bet on a hot sector or industry is to buy the entire basket.

It’s beautiful both for its inherent diversification and the dodging of any earnings announcements. When it comes to solar, the only ETF worth trading is TAN. Believe it or not, the fund has gained some 500% since its March 2020 low.

Despite the enormous climb, momentum continues to increase, giving little reason to second guess the powerful trend. Last Friday’s drop was rapidly bought and confirms dip buyers are still very much alive and well.

Implied volatility is running hot at the 51st percentile and makes me favor selling put spreads over buying call spreads.

The Trade: Sell the Feb $95/$90 bull put for 75 cents.

Canadian Solar (CSIQ)

Canadian Solar (CSIQ) stock chart with bull retracement

Source: The thinkorswim® platform from TD Ameritrade

If you’re comfortable with the idiosyncratic risk that comes with single stock plays, then take a good look at Canadian Solar. It has fantastic trending characteristics and has been a favorite among the momentum crowd for months.

CSIQ stock followed TAN into the rising 20-day moving average on Friday and has come ripping back over the past two trading sessions. Wednesday’s 4% rally outpaced the industry’s 0.68% gain by a large margin. I like the relative strength and believe it’s an omen of more upside to come.

Volume patterns have also heavily favored bulls. Accumulation days litter the landscape and are evidence of institutions piling in. I’m going with a more directional bet on this one using call options.

The Trade: Buy the Feb $60/$65 bull call vertical for around $1.35.

The max loss is limited to the initial $1.35 cost and will be forfeit if CSIQ stock sits below $60 at expiration. If it rises past $65, though, you could capture the max gain of $3.65.

SunPower (SPWR)

SunPower (SPWR) stock chart with powerful uptrend

Source: The thinkorswim® platform from TD Ameritrade

I’ve left the best of the solar stocks for last. SunPower has climbed from $4 to nearly $40 in less than a single year. The momentum is feeding on itself, and it’s anyone’s guess as to when cooler heads will prevail. If the post-March market has taught us anything, though, it’s that you second-guess or bet against the uptrend at your own peril.

That said, SPWR stock is definitely flirting with overbought conditions here, and I much prefer the higher probability and wider profit range of naked puts than speculative call buys. The implied volatility and low stock price work to its advantage. Plus, we can get high enough returns to make passing on long calls more palatable.

The Trade: Sell the Feb $30 puts for $1.50.

Consider it a bet that prices sit above $30 at expiration. If they do, you’ll pocket the $1.50 per share max gain. If the puts are in-the-money at expiration, you will be obligated to buy shares at a cost basis of $28.50.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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