First Solar could be a surprise winner for investors as energy becomes a focus of the incoming Trump administration. One method of winning with the green energy stock is to apply an iron condor option trade, Anne-Marie Baiynd says.
President-elect Donald Trump ran on promises to boost the U.S. energy industry, with a focus on drilling for oil and gas. But the rising importance of domestic energy in general could also benefit alternative energy players like First Solar.
"I'm sitting in the macro notion that what the U.S. is going to be after its energy independence," Baiynd told Investor's Business Daily's "Investing with IBD" podcast. She says the overall need for energy is large enough to support solar alongside demand for other energy sources like nuclear and fossil fuels. "It's just going to be, can we find enough ways to make energy now," Baiynd said.
Audio Version Of Podcast
Using A Layer-Cake Strategy On First Solar
To take advantage of the focus on the energy sector, Baiynd suggests using a layer cake of options strategies for a stock that's expected to stay range-bound.
The formula starts with a cash-secured short put, where a trader sells a put and sets aside the cash in case they are assigned the shares. This is especially relevant if the stock in question is one that you would like to own.
The short strike is then set at the stock's expected support level. If the stock falls below the strike, a trader will most likely be assigned shares and the cash set aside gets used for that purchase. The premium from selling the put helps offset some of the cost of the buying the stock.
If a stock doesn't fall by the expiration, the trader just pockets the premium and can potentially replay the same strategy to create an income stream.
Evolving A Simple Short Put
Adding another layer can create a spread trade. By buying a put at a lower strike price, the trader does not need to have the cash set aside. That's because losses will be capped if the stock falls below the long put strike. In such a trade, gains from the long put offset the losses in the short put. This strategy is called a bull put spread.
To turn this into an iron condor, add a bear call spread. An iron condor is an options strategy that yields the most when an asset trades within a range. If there is an area of resistance that a trader thinks a security will stay below, sell a call at that level and protect it with a long call.
The iron condor is ideal for stocks that go back and forth between support and resistance, but ultimately stay range-bound. Traders can collect more premium with the two spreads.
If traders go with a wide range between short strikes, the options might generate less premium but have a higher probability of success. Conversely, having a narrow range can bring in more profit, but comes with a greater likelihood that the stock trades outside of a chosen range.
First Solar In The Talons Of An Iron Condor
Baiynd says she believes demand for solar energy will continue, and accordingly modifies her iron condor pattern to be bullish. If the stock falls, in other words, Baiynd is betting it won't fall too far because of market support.
A second strategy is to own the stock outright, where a cash-secured put will net some premium up front. A trader will gain as the stock rises, but if the stock falls to its strike price, the trader is assigned the stock at a discount.
She cites First Solar stock's relative strength and best-in-group performance, with the stock ranked No. 1 in its energy-solar group according to IBD Research. The stock does, however, have a subpar IBD Composite Rating of 58.
Baiynd detailed an iron condor trade idea for First Solar stock on this week's episode of the "Investing with IBD" podcast. Tap here to learn more about iron condors, call walls and more with Anne-Marie Baiynd.
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