Enphase Energy has held up very well amid the bear market this year and is currently treading near a buy point. According to IBD Stock Checkup, Enphase stock ranks No. 1 in its group.
Plus, the solar inverter and battery storage firm owns a perfect Composite Rating of 99, a likewise perfect EPS Rating of 99 and a stellar Relative Strength Rating of 98.
Enphase stock is above rising the 21-day exponential moving average, as well as its 50- and 200-day moving averages. Therefore, let's look at a trade in the form of 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 trades sideways or higher — and even sometimes if it trades slightly lower.
Enphase Stock: Targeting December Options
With Enphase stock trading just below 320, if we use put options with a Dec. 16 expiration, we can sell a put option with a 300 strike price and buy a 295 put for around $1.60.
Selling this spread would generate roughly $160 in premium with a maximum risk of $340.
If the spread expires worthless, then the trader gets a 47% return in 3-1/2 weeks, provided shares swim above 300 at expiration.
The maximum loss? If Enphase stock closes below 295 on Dec. 16, the premium seller would lose $340 on the trade.
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Break-Even Point
The break-even point for the trade stands at 298.40. You can calculate this as 300 less the $1.60 option premium per contract.
I would set a stop loss if Enphase stock drops below 305. Otherwise, another good rule of thumb? Limit the loss to the amount of premium received, which in this case would be $160.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
EPNH is not due to report earnings until January, so there would be no earnings risk with this trade.
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
