This Stock Could Power the Economy Of the Future
Trade summary: A bull call spread in Plug Power Inc. (Nasdaq: PLUG) using the July $8 call option which can be bought for about $0.84 and the July $10 call could be sold for about $0.43. This trade would cost $0.41 to open, or $41 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 $41. The maximum gain is $159 per contract. That is a potential gain of about 287% based on the amount risked in the trade.
Now, let’s look at the details.
This stock moved higher on news that was at The Street:
PLUG “jumped [recently] after analysts at B. Riley and Cowen lifted their price targets on the green-energy company following two acquisitions it made…”
The reported continued, “B. Riley analyst Christopher Souther raised his price target to $8 a share from $7 while Cowen’s Jeff Osborne raised his price target to $9 from $6.
The upgrades came after Plug said it acquired United Hydrogen Group of Canonsburg, Pa., and GinerELX of Newton, Mass.
The acquisitions are in line with a vertical-integration strategy that Plug Power has been pursuing, the Latham, N.Y., company said in a Tuesday statement.
“These activities further enhance Plug Power’s position in the hydrogen industry with capabilities” in generating, liquefying and distributing hydrogen fuel, thus complementing its position in designing, building and operating customer-facing hydrogen fueling stations, Plug Power said.
“Improving the fueling cost and network is potentially a key enabler of potential expansion into commercial vehicles,” said Souther.
Osborne’s upgrade was based on Plug’s increase in sales and Ebitda projections for 2024 in the acquisition announcement.
The company expects to report revenue of $1.2 billion in 2024, up from its previous projection of $1 billion. PLUG expects operating profit of $210 million that year, up from its previous estimate of $170 million. And it sees adjusted earnings before interest, taxes depreciation and amortization up 25% to $250 million.
“Plug Power is focused on becoming one of the largest green hydrogen generation companies in the United States over the next five years and globally thereafter, and plans to continue to work with existing and new partners to accomplish this goal,” the company said in the statement Tuesday.
PLUG is now breaking out as shown in the next chart, which uses weekly data to show the long term trend.
While PLUG is not profitable, sales have been increasing with growth averaging almost 30% a year over the past five years. The stock price could move substantially higher as the company moves towards profitable operations.
A Specific Trade for PLUG
For PLUG, the July 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 July $8 call option can be bought for about $0.84 and the July $10 call could be sold for about $0.43. This trade would cost $0.41 to open, or $41 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 $41.
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 PLUG, the maximum gain is $159 ($10- $8= $2; 2- $0.41 = $1.59). This represents $159 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $41 to open this trade.
That is a potential gain of about 287% 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 PLUG 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.