This Solar Company Could Provide an 85% Short Term Gain
Trade summary: A bull call spread in Sunrun Inc. (Nasdaq: RUN) using the August $40 call option which can be bought for about $3.20 and the August $45 call could be sold for about $1.45. This trade would cost $1.75 to open, or $175 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 $175. The maximum gain is $325 per contract. That is a potential gain of about 85% based on the amount risked in the trade.
Now, let’s look at the details.
The company announced new partnerships.
GlobeNewswire reported, “RUN, the nation’s leading residential solar, battery storage and energy services company, has signed three new agreements with leading community energy suppliers in the Bay Area to provide affordable, clean solar and battery backup power to customers who are facing rising electricity costs and power shutoffs.
Sunrun has secured exclusive partnerships with three Bay Area Community Choice Aggregators (CCAs), which collectively provide power for approximately one million homes.
The partnerships are with East Bay Community Energy (EBCE), which supplies power to Alameda County, Silicon Valley Clean Energy (SVCE), which supplies power to Santa Clara County, and Peninsula Clean Energy, which supplies power to San Mateo County.
The CCAs sought options to help increase the use of clean, affordable energy while also providing backup power to more of their customers following forced blackouts by PG&E that affected hundreds of thousands of customers in the Bay Area.
The customers of the CCAs benefit from affordable clean energy along with backup power capabilities, while each CCA can benefit from stronger customer relationships and optimized procurement of clean capacity resources. Sunrun benefits from the co-marketing initiatives and advanced data-RUNven targeting and optimization enabled by the partnerships, which can enhance the value provided to each customer.
The partnerships initially target providing solar energy and emission-free backup power to up to 6,000 households over the next three years in areas vulnerable to emergency power shutoffs during wildfire season.
Over 10 percent of the households will be low-income households, a population that is particularly vulnerable during power shutoffs. In total, the partnerships envision building out more than 13 megawatts of home-sited capacity resources.
“Sunrun’s Brightbox rechargeable solar battery system can help families power through blackouts and better manage energy costs when they need it most,” said Lynn Jurich, Sunrun co-founder and Chief Executive Officer.
“We’re excited to partner with these innovative energy providers to begin paving the way towards a cleaner, more resilient and affordable energy system.”
In addition to providing backup power in case of a power shutoff at each home, these resources can be networked together to build virtual power plants, which can help reduce peak power demand, and effectively enable the use of local resources to stabilize the operation of California’s electrical grid in real time.
This need has historically been met through purchasing electricity supply capacity from distant, centralized power plants.
Sunrun’s agreements with the three community suppliers will shift a portion of those purchases to new, local solar and battery systems that provide the benefits of backup power directly to local homes.
People will be able to use power near where it’s produced, which reduces the need for expensive transmission and distribution system upgrades.”
The stock appears to be at support, after a pull back from new highs.
The new highs come after a strong rally and there is risk of a steeper pullback.
A spread trade can limit risk while allowing for additional upside.
A Specific Trade for RUN
For RUN, the August 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.
An August $40 call option can be bought for about $3.20 and the August $45 call could be sold for about $1.45. This trade would cost $1.75 to open, or $175 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 $175.
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 RUN, the maximum gain is $325 ($45- $40= $5; 5- $1.75 = $3.25). This represents $325 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $175 to open this trade.
That is a potential gain of about 85% 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 RUN 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.