This Alternative Energy Stock Could Deliver an 87% Gain
Trade summary: A bull call spread in Ormat Technologies, Inc. (NYSE: ORA) using the December $70 call option which can be bought for about $4.05 and the December $75 call could be sold for about $1.38. This trade would cost $2.67 to open, or $267 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 $2.67. The maximum gain is $233 per contract. That is a potential gain of about 87% based on the amount risked in the trade.
Now, let’s look at the details.
Globe Newswire reported that ORA announced that it has signed two Resource Adequacy Agreements, each for 50% of its 5 MW / 20 MWh Tierra Buena battery energy storage project currently under development in Sutter County, northern California.
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Two Community Choice Aggregators (“CCAs”), Redwood Coast Energy Authority (“RCEA”) and Valley Clean Energy (“VCE”), each signed an agreement for 2.5 MW of resource adequacy from Ormat’s Tierra Buena energy storage project. Under the 10-year agreements, the project is expected to begin commercial operation no later than June 2022.
Traders seemed to cheer the news.
These are the first energy storage deals for the two CCAs, sought in order to comply with a multi-year statewide mandate to add 3.3 GW of incremental resource adequacy to the California grid by 2023. This project marks another expansion of Ormat’s energy storage footprint in California, its current primary growth market for energy storage. It is in addition to Ormat’s acquisition of the operating Pomona energy storage facility (20 MW/ 80 MWh) and the ongoing construction of the Vallecito energy storage project (10 MW / 40 MWh), also in California.
“Ormat is committed to being an active participant in California’s effort to achieve its goal of 100% carbon-free electricity by 2045,” commented Doron Blachar, Ormat’s Chief Executive Officer.
“Increasingly, energy storage plays a key role in making this transition reliable and cost-effective, and Ormat continues to expand its presence and capabilities in this area. In particular, Ormat is focused on serving CCAs around the state, bringing innovative solutions focused on renewable and sustainable energy resources to meet current and projected demand, responsibly. We are pleased to leverage our proven capabilities and provide grid operators with the expertise to enhance grid performance, stability and responsiveness, while delivering capacity at the right time, the right place, and the right price.”
“Valley Clean Energy is proud to announce our partnership with sister agency Redwood Coast Energy Authority, and battery storage experts Ormat, on this initiative,” said Don Saylor, VCE’s Chair of the Board.
“Battery storage is critical to maintaining grid stability, especially within the context of increasing wildfires and power shutoffs in California. VCE’s customers will continue to benefit from our commitment to climate resilience, community benefits and partnering on local projects like Tierra Buena.”
“The Tierra Buena battery energy storage project will help us deliver cost-effective, low carbon electricity to our customers while helping the state maintain grid reliability as we transition to renewables,” said Matthew Marshall, Executive Director of RCEA.
“The deployment of energy storage statewide allows Community Choice Energy programs like ours to play a critical role in helping retire aging gas infrastructure by providing the flexibility necessary to rely on renewable sources to meet our energy needs.”
CCAs provide a large and growing portion of California’s energy supply. There are over 10 million electric accounts served by CCAs in California, providing power to tens of millions of people. Ormat will deliver long-term resource adequacy to RCEA and VCE while also participating in merchant energy and ancillary services markets run by the California Independent System Operator, contributing to overall grid stability and reliability.
The stock appears to be forming a double bottom pattern in the weekly chart and could reach new highs on a breakthrough.
A Specific Trade for ORA
For ORA, the December 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 December $70 call option can be bought for about $4.05 and the December $75 call could be sold for about $1.38. This trade would cost $2.67 to open, or $267 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 $267.
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 ORA, the maximum gain is $233 ($75- $70= $5; 5- $2.67 = $2.33). This represents $233 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $267 to open this trade.
That is a potential gain of about 87% 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 ORA 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.