A New Market Creates a New Double Digit Opportunity
Trade summary: A bull call spread in Enphase Energy, Inc. (Nasdaq: ENPH) using the June $55 call option which can be bought for about $3.69 and the June $60 call could be sold for about $1.75. This trade would cost $1.94 to open, or $194 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 $1.94. The maximum gain is $306 per contract. That is a potential gain of about 57% based on the amount risked in the trade.
Now, let’s look at the details.
The company uses GlobeNewswire to announce an expansion into Poland through a collaboration with SmartX Sp. z o.o., a solar distributor with headquarters in Bytom, Poland. Currently, Poland has one of the top five solar markets in Europe, with an estimated installed capacity of more than 1 GW.
“We are excited to work with Enphase to further the growth of solar throughout Poland,” said Piotr Redkiewicz, CEO at SmartX. “Enphase microinverters offer unique advantages for European solar markets, particularly in new build and small residential systems due to their scalable architecture, and significantly enhance the customer experience in terms of quality and performance.”
SmartX’s installer network throughout Poland offers both residential and small commercial microinverter systems, utilizing Enphase IQ 7™ family of microinverters including IQ 7, IQ 7+™ and IQ 7X™. In addition, SmartX’s residential solar systems are outfitted with Enphase Envoy™ communications gateways, which connect an Enphase-based solar system to the Enphase Enlighten™ monitoring platform and helps make per-panel energy monitoring and insights for operations and maintenance easy.
“Enphase microinverters are easy to install, reliable and produce more energy than traditional central inverter photovoltaic (PV) systems,” said Radek Koczwara, owner at Roka Energy Poland. “As an experienced solar installer, I decided to concentrate on Enphase products because my customers have been very happy with them, which has helped build a good reputation for my business.”
IQ 7, IQ 7+ and IQ 7X microinverters leverage Enphase’s unique software-defined architecture and semiconductor integration for excellent reliability and economies of scale. Enphase microinverters are subjected to a rigorous reliability and quality testing regimen with more than an aggregated one million hours of cumulative power-on testing to ensure exceptional performance under heat, high humidity, salty air, and extreme cold. The Company’s microinverters are designed to be long-lived energy assets and are backed by a 25-year limited warranty.
“We are pleased to work with SmartX to introduce our products in Poland,” said David Ranhoff, chief commercial officer at Enphase Energy. “Both companies share a commitment to providing the highest quality solutions and superior customer experience, and we look forward to our continued collaboration in the promising Polish solar market.”
The daily chart shows a potential cup with handle pattern, a bullish indicator.
Based on the weekly chart, a support area is visible that propelled the initial rally. Recent support near $55 should limit risk.
A Specific Trade for ENPH
For ENPH, the June 19 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A June 19 $55 call option can be bought for about $3.69 and the June 19 $60 call could be sold for about $1.75. This trade would cost $1.94 to open, or $194 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 $194.
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 ENPH, the maximum gain is $3.06 ($60- $55= $5; 5- $1.94 = $3.06). This represents $306 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $194 to open this trade.
That is a potential gain of about 57% 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 ENPH 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 usually 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.