Enphase Energy stock has been one of the best market performers in the last few months and is currently a member of IBD Leaderboard.
ENPH stock is also showing improving relative strength in high volume. One bullish way to play the stock could be via a bull put spread.
As a reminder, a bull put spread is a defined risk strategy. So you always know the worst-case scenario in advance.
This type of trade will profit if ENPH stock trades sideways or higher. It can even work sometimes if it trades slightly lower.
With Enphase trading around 316, if we use the October expiration. We can sell a 295 put and buy a 290 put for around $1.65.
Trade Offers 49% Return In Less Than 5 Weeks
Selling this spread would generate roughly $165 in premium. The maximum risk is $335.
If the spread expires worthless that would be a 49% return in four and a half weeks, provided ENPH stock is above 295 at expiration.
The maximum loss would occur if ENPH stock closes below 290 on Oct. 21, which would see the premium seller lose $335 on the trade.
The break-even point for the trade is 293.35, which is calculated as 295 less the $1.65 option premium per contract.
In this market environment, I would set a pretty tight stop loss and look to close the trade if ENPH stock drops below 300.
Set Limit For Cutting Losses
Otherwise, another good rule of thumb is to limit the loss to the amount of premium received, which in this case would be $165.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, ENPH stock is ranked No. 1 in its Solar Energy industry group and has a Composite Rating of 99, an EPS Rating of 98 and a Relative Strength Rating of 99.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
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
