A Solar Power Trade That Could Provide a 43% Gain
Trade summary: A bull call spread in Enphase Energy, Inc. (Nasdaq: ENPH) using the June 17 $50 call option which can be bought for about $6.30 and the June 17 $55 call could be sold for about $4.25. This trade would cost $2.05 to open, or $205 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 $2.05. The maximum gain is $295 per contract. That is a potential gain of about 43% based on the amount risked in the trade.
Now, let’s look at the details.
ENPH recently announced a new partnership. The details were in a press release from GlobeNewswire.
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The partnership is with Sunlogics, a full-service residential solar installer that delivers custom-made solar solutions to customers in Belgium.
Sunlogics, with headquarters in Dilsen-Stokkem, Belgium has installed more than 30MW of residential solar, enough to power ten thousand families in Limburg, Antwerp and Brabant.
Sunlogics selected Enphase as its exclusive microinverter supplier using Enphase IQ 7and IQ 7microinverters for the SunPower P-Series modules.
In addition, Sunlogics’ 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.
“Our residential customers who purchase a solar system using Enphase microinverters are looking at the long term,” said Daniel Vanwetswinkel, CEO at Sunlogics.
“When we meet with prospective customers, we are able to validate their potential return on investment by choosing Enphase microinverters.
While an installation with string inverters might seem less expensive, the requirement to replace them after twelve years means the price advantage is lost. Enphase microinverters are backed with a 25-year limited warranty, making them more cost-effective.”
The stock was up on the news and is now in a short term up trend with a series of higher lows clearly visible on the chart. The up-side break out on the news pushed prices out of the trading range that contained the action for much of April.
The long-term chart shows the potential of ENPH. This was a market leader and its rapid recovery indicates the up-trend could continue.
The stock is at resistance and a breakout should push the stock relatively quickly to recent highs near $60. Gaps are relatively rare on weekly charts and their rarity ends to make them significant. The price target based on the deep pattern is about $75, at which point the price to earnings ratio would be about 50 and the risks would be high. A spread could help manage those risks.
A Specific Trade for ENPH
For ENPH, the June 17 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 17 $50 call option can be bought for about $6.30 and the June 17 $55 call could be sold for about $4.25. This trade would cost $2.05 to open, or $205 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 $2.05.
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 $2.95 ($55- $50= $5; 5- $2.05 = $2.95). This represents $295 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $205 to open this trade.
That is a potential gain of about 43% 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 ENPH 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.