First off, in full disclosure, I am a big fan of solar power. Since the Solyndra failure and the speculated cancellation of European investment in solar, the entire sector has been widely thought of as a "dying industry."
I believe in solar over the long term. What I'm proposing is not suitable for traders and investors who expect to get rich overnight. There may very well be another leg down in solar, particularly if the economic situation in Europe worsens.
What I would like to do is take advantage of the incredible rally solar has had lately to try and get into the best-of-breed company at a discount, should the rally lose steam. First Solar, Inc. (FSLR) has rallied from the mid-$11s to Wednesday's close of $23.48.
World energy demand is forecast to grow from 10 TW (terawatts) to around 50 TW in 2050. So, Earth's energy usage is going to increase five-fold in a timespan of less than four decades. The majority of this increase is expected to be in emerging nations.
Solar is really going to be the only answer to increasing energy demand. Fossil fuels are "expensive" today. Imagine how much a barrel of crude oil will cost when demand is five times as high, and we have spent another 38 years draining our supplies. If you think $20 gas is impossible, think again.
Wind and geothermal power meet the criteria of being affordable; however they are impractical at such a large scale. Nuclear is capable of being implemented on a large enough scale, but construction of nuclear plants will be prohibitively expensive, especially considering most of the increase in energy use will be in developing countries.
Solar is both affordable and capable of being implemented on a large scale, making it the most practical answer to our future energy needs. The price of solar PV panels has consistently dropped over the years, and like any new technology, should continue to do so for the foreseeable future.
First Solar is by far the leader in solar technologies. It constantly breaks its own records for solar panel efficiency. It is also an incredibly volatile stock, with a historical volatility of 89.5%.
I propose a trade to take advantage of the high volatility in the stock, and to possibly get into First Solar at an incredible price if there is another collapse in the stock price due to Europe or another competitor failing. What I want to do is sell the January 2014 put option for $3.60. There are two potential outcomes for this trade.
First, there is a very real possibility that First Solar will never see the sub-$20 range again, especially if things keep going the way they have been recently. In this case, you pocket the $360 collected in options premium, and have no further obligations to the stock. Comparing this to the $1,500 in cash or margin most brokerages will tie up to allow this trade, and you have a 24% return on investment.
On the other hand, if at any point between now and January 2014, the stock is at or below $15, you will have the stock "put" to you for that amount. Since you have collected $3.60 in options premium, your cost basis in First Solar would be only $11.40. This is less than the stock's all-time low of $11.43, when most people thought it was going to zero.
On that issue, don't be scared of this trade going bad due to a bankruptcy or anything of that nature with First Solar. It has more than enough in long-term contracts and recurring business to keep it running far beyond the expiration date of your options, even without any new business.
Disclosure: I am long FSLR.