Bull Put Spread Poaches Premium As First Solar Stock Shines Brightly

Tempe, Ariz.-based First Solar (FSLR) designs, manufactures and distributes photovoltaic solar power systems and modules that convert sunlight into electricity. The stock is a double since June and has surged 78% since Sen. Joe Manchin (D-WV) changed his position and supported the Inflation Reduction Act, which passed the Senate one month ago. The legislation is chock full of subsidies, tax breaks and other incentives to stimulate solar power initiatives. Correspondingly, analysts’ average 2023 earnings estimate for First Solar earnings per share have increased 38% in the past 30 days.

Today’s trade is a bull put spread on First Solar (FSLR) involving monthly October puts that expire in 43 days. The company does not pay a dividend, but improving fundamentals and exceptional technical strength make it a compelling underlying stock for this trade.

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First Solar (FSLR) – Bull Put Spread

Buy to Open 1 FSLR October 21 $120 Put

Sell to Open 1 FSLR October 21 $125 Put

Execute for Net Credit of $1.25 or higher

A bull put spread is a neutral to bullish position on the underlying stock involving the purchase of a put at a lower strike price and the sale of a put at a higher strike price. This type of trade makes the maximum amount of money if the stock closes at expiration above the higher strike price. The capital you have at risk is the difference between the strike prices minus the money you earn when you enter the trade.

Technically, First Solar shares are at all-time highs. The breakout above $121 last week and the surge last month both happened on staggering volume, giving the bullish move a high degree of credence.

Even more impressive is a five-year weekly chart.

Today’s bull put spread articulates the view that FSLR will remain above $125 for the next 43 days. This would produce the maximum profit for this trade. The breakeven would be FSLR at $123.60. That would be a 10% drop from current prices near $137.20.

Here is the trade: Buy to open 1 contract of FSLR $120 October 21 puts, and sell to open 1 contract of $125 October 21 puts. You should be able to earn a net credit of $1.40 per option for the combined transaction as shown below.

The most you can lose in a put spread on a per-share basis is the difference between the strike prices ($125-$120=$5.00), minus the net credit earned ($1.40), or $3.60. Because each options contract covers 100 shares of stock, this means you have $360 at risk in pursuit of $140 profit for each contract. If you’re comfortable trading more contracts, just keep in mind that you’d be risking $360 for each one.

Currently, options prices reflect a 26% probability that these $125 puts will expire in the money, but that increases at a quickening pace as the stock price drops.

If the stock closes above $125 at expiration, you would keep your $140 of total premium earned today with no further obligation. The return would be 38.9%.

If you do not close out this trade early, you could be compelled to buy 100 shares of FSLR at $125 for every contract traded if the stock closes at or below $125 at expiration in 43 days. You could actually get assigned at anytime until expiration if the holder of the puts wishes to exercise their right to sell at $125.

Options income for this trade: $140 buying to open 1 FSLR October 21 $120 put contract, and selling to open 1 FSLR October 21 $125 put contract.

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NOTE: Forbes Premium Income Report is intended to provide information to interested parties. As we have no knowledge of individual circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any assets or securities mentioned or recommended. We do not guarantee that investments mentioned in this newsletter will produce profits or that they will equal past performance. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. John Dobosz and members of the staff of Forbes Premium Income Report may hold positions in some or all the assets/securities listed. Copyright 2022 by Forbes Media LLC.