The Invesco Solar ETF successfully retested the 200-day moving average last week. It's showing strong relative strength and looks to be on its way to rising above the 50-day line. One moderately bullish way to play TAN stock is via a bull put spread.
Solar stocks, like Enphase Energy and First Solar have performed well since the Inflation Reduction Act moved to passage. The bill contained the biggest batch of government alternative energy subsidies in history.
If you find yourself bullish on a short-term play, a bull put spread on TAN stock lets you collect premium but with a risk-defined strategy. That is, you always know the worst-case scenario in advance.
This type of trade will profit if TAN stock trades sideways or higher and even sometimes if it trades slightly lower.
Bull Put Spread On TAN Stock
With TAN stock trading around 76, if we use the Oct. 21 expiration, we could sell a 70 put and buy a 65 put for around 85 cents per share Monday.
Selling this spread generated roughly $85 in premium with a maximum risk of $415.
The max profit occurs with TAN stock above 70 at expiration. In that case, all the options expire worthless and you keep your $85 in premium.
The maximum loss of $415 occurs if TAN stock closes below 65 on Oct. 21. You calculate that by taking the difference in the strikes (70-65=5), multiply by 100, and subtract the premium received.
If the spread expires worthless that's a 20% return on risk in less than three weeks.
Managing The Trades
The break-even point for this option trade on TAN stock is 69.15. To find that, take the short strike of 70 minus the 85 cents option premium per contract.
In this market environment, I would set a pretty tight stop loss and look to close the trade if TAN drops decisively back below its 200-day line, say around 72.
Otherwise, another good rule of thumb is to limit the loss to the amount of premium received which in this case would be $85.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Let's also revisit some trades from previous columns. The diagonal put spread on Adobe is up around 11% and could possibly be closed early.
A recent bearish calendar spread on Lululemon Athletica is also up around 15% and can be closed.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
