First Solar, a new member of IBD Leaderboard, has rallied sharply in recent months. Today's column introduces a double butterfly options trade in First Solar stock.
After watching the daily recaps on IBD Live this past week, my eyes turned to First Solar stock. Clearly it's a strong name in a previously weak sector. According to IBD Stock Checkup, the utility-scale solar infrastructure firm hosts a mediocre 72 Relative Strength Rating. However, the Composite Rating is 93 on a scale of 1 to 99, tops in IBD's solar energy industry group.
Plus, MarketSurge shows FSLR holding a good 3-month RS Rating of 92. Over the past three months, First Solar stock has outperformed 92% of all companies in the IBD database.
Yet FSLR is also a gappy stock that certainly continues to rise against shrinking volume.
This action confirms Mike Webster's take on why volume paints a contaminated picture of price action.
Energy will no doubt be an integral part of a solid portfolio. Knowing this, we could see an advance in First Solar stock and potentially see it test the 200 price level, just as Ken Shreve notes with Ali Coram in a recent video here.
First Solar Stock: The Set-Up
The heartbreak of First Solar in days past is alive and well in my heart (chuckle). So I'm going to position something that gives us a shot at both upside and downside. This means the trade will be inexpensive and bind risk at the same time.
When we can have the ability for strong upside returns and hold risk in check, our probabilities suffer. So, we must contain size in our decisions. Translation: Never bet the farm on butterflies, at least in options.
The double butterfly is composed of one butterfly spread trade that holds calls. Another butterfly spread holds puts. The reader can choose either of these sides based on personal opinion about the stock or both.
Here's how to structure this trade in First Solar stock. For the long call spread (total debit of $1.20 per set of contracts, based on recent trading):
- Buy to open 1 FSLR July 19-expiration call with a 200 strike price
- Sell to open 2 FSLR July 19 210 calls
- Buy to open 1 FSLR July 19 220 call
The Second Butterfly
For the long put spread (total debit $0.93):
- Buy to open 1 FSLR July 19 180 put
- Sell to open 2 FSLR July 19 170 puts
- Buy to open 1 FSLR July 19 160 put
Total debit of $2.13 per set of contracts gives you the total risk as well. Therefore, break-even cost for the stock sits near $202.13 on the call side and $177.87 on the put side. Figure the cost of the position by referring to the first strike price noted in each set of butterfly spreads.
Remember to set a price alert for the short strikes. This will help you manage risk and take profits. An alert set for each of the middle-price strikes, or the short strikes, will alert you to leaving the position.
The ideal result gives us three choices to exit the trade. One, sell the spread once it carries an acceptable profit, around 100% for me with butterfly spread trades. Two, sell the spread once the middle strike alert is triggered. Three, sell the spread once it hits your loss threshold as determined by personal risk. And finally, sell the spread into the week before expiration, if all is going well. I have had many a trade go sideways, taking it down to the wire and not capturing gains.
This Is The IBD Stock Of The Day
Defending The Trade
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
The goal of taking the double butterfly? Position the trade in the likelihood of a stronger move over the next 60 days into the middle strike of our butterflies. And we could also sell strikes further out to finance our position.
Let's identify key chart levels in First Solar stock. The monthly resistance zone sits just above 200. Price support sits near 170. These levels give us the short strikes of our positions. We expect the stock price to gravitate to these price levels over time.
How The Strategy In First Solar Stock Profits
Scenarios for the First Solar butterflies:
- First Solar stock sticks in a range. Both butterflies erode to zero. This is why we set risk limits.
- Share prices expand to the north and our call butterflies grow in value.
- First Solar stock expands to the south; our put butterflies grow in value.
- There is a sweet spot with butterflies at the middle strike, so pay attention to the 170 and 210 price levels in particular.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
