Solar stocks are on the move, and First Solar is leading the charge. Therefore, let's consider a bull put spread trade in FSLR stock.
FSLR stock showed a massive 40% gain last week. We'll look at an option trade to see if we can eke out some more gains, even if First Solar stock doesn't move higher in the next few weeks. That's made possible using a credit spread, and specifically the bull put spread in First Solar.
Why A Bull Put Spread Option?
As a reminder, a bull put spread starts by selling a put and then buying a further out-of-the-money put to define the risk. You receive a credit since you take in more premium. At the same time, you also know your worst-case scenario in advance. Why? That's thanks to the long put that acts as coverage.
We'll proceed under the belief that First Solar will be able to stay above 250 over the next few weeks with this bull put spread trade.
This type of trade will profit if FSLR stock trades sideways or higher, and in this case even if it trades slightly lower.
FSLR Stock: Setting Up The Trade
With FSLR stock trading around 279 in afternoon trading, we'll use the June 21 expiration to sell a 250-strike put and buy a 245 put. That produces a credit of around $1.05 per set of contracts, based on recent trading.
In other words, selling this spread generates roughly $105 in premium with a maximum risk of $395.
If the spread expires worthless, that would be a 27% return on risk in 24 days. That's provided that FSLR stock is above 250 at expiration. That gives First Solar a lot of room to move around.
Risk Vs. Reward
The maximum loss would occur if FSLR stock closes below 245 on June 21, in which the premium seller would lose $395 on the trade.
The break-even point for the trade is 248.95. Calculate this by taking 250 less the 1.05 option premium per contract.
I would set a stop loss if the loss is equal to the amount of premium received, which in this case would be $105.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, First Solar stock ranks No. 1 in its industry group. It has a perfect Composite Rating of 99, an EPS Rating of 82 and a Relative Strength Rating of 97.
It's important to 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 X/Twitter at @OptiontradinIQ
