A Deal Makes This Solar Stock Interesting to Traders
Trade summary: A bull call spread in JinkoSolar Holding Co., Ltd. (NYSE: JKS) using the November $65 call option which can be bought for about $6.80 and the November $70 call could be sold for about $4.70. This trade would cost $2.10 to open, or $210 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $210. The maximum gain is $290 per contract. That is a potential gain of about 138% based on the amount risked in the trade.
Now, let’s look at the details.
PR Newswire carried the story that JKS, “one of the largest and most innovative solar module manufacturers in the world, today announced that the Company and its subsidiary Sichuan Jinko have signed a long-term purchase agreement with second tier subsidiaries of Tongwei Co., Ltd., namely Sichuan Yongxiang Polysilicon Co., Ltd., Sichuan Yongxiang New Energy Co., Ltd., Inner Mongolia Tongwei High-purity Crystalline Silicon Company, and Yunnan Tongwei High-purity Crystalline Silicon Company.
The raw materials procurement will ensure a stable supply of polycrystalline silicon in line with JinkoSolar’s strategic and operational plans.
Under the agreement, JinkoSolar has locked in nearly 100,000 metric tons of polycrystalline silicon and both parties can negotiate additional purchases. The price for any additional order will be negotiated and determined based on market conditions at that time.
Mr. Kangping Chen, Chief Executive Officer of JinkoSolar, commented, “Building strategic partnerships with suppliers of key raw materials is essential for our business and to raise our competitive edge in the solar industry.
We are very pleased to begin this partnership with an industrial leader like Tongwei, a strategic cooperation that will contribute to the stability of JinkoSolar’s long-term business. This is the first long-term contract with Tongwei for the steady supply of poly-Si, a win-win scenario that will no doubt bring on other advantages for both parties and further promote the development of renewable energy. We look forward to more opportunities with Tongwei, and to explore other ways we can work together to create value for the global PV industry.”
Mr. Duan Yong, Director of Tongwei Co., Ltd., Chairman and General Manager of Yongxiang Co., Ltd., commented, “JinkoSolar is one of Tongwei’s most trusted customers and we are very pleased to reach a strategic cooperation with a leading PV module manufacturer like JinkoSolar.
The signing of this contract is conducive to the stable sales of Tongwei’s high-purity polysilicon products and is in line with our future business strategy. It is also conducive to bringing into play the leading advantages of two major industry players in the PV industry, and to jointly promote the development of the global PV market.”
The stock has been volatile but appears to be forming a basing pattern.
The longer term chart shows that the volatility is unusual in the stock.
Extreme volatility can increase risk and a spread trade could help manage risk.
A Specific Trade for JKS
For JKS, the November options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A November $65 call option can be bought for about $6.80 and the November $70 call could be sold for about $4.70. This trade would cost $2.10 to open, or $210 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $210.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in JKS, the maximum gain is $290 ($70- $65= $5; 5- $2.10 = $2.90). This represents $290 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $210 to open this trade.
That is a potential gain of about 138% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying JKS could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.