Enphase Energy is showing extremely high implied volatility in the lead up to the company's earnings announcement on April 23.
There is also significant volatility skew, with short-term options showing much higher implied volatility than long-term options.
One way to take advantage of this skew is via a diagonal put spread. This is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
Let's look at an example:
Traders could sell an April 26 put with a strike price of 100 and buy a May 10 put with a strike price of 95.
As of Wednesday's close, the April 26 put could be sold for around $2.25 and the May 10 put could be bought for $2.30.
Max Profit $450 On Option Trade Trade
The net cost of the trade would be $5, which is also the maximum risk on the upside.
The risk on the trade is on the downside with a potential maximum loss of $505. This is calculated by taking the difference in the spread (5) multiplied by 100 and adding in the cost of the trade ($5).
The maximum potential gain is around $445, which would occur if Enphase stock closes right at 100 on April 26.
The trade has a large profit zone between 92 and 130.
If Enphase stock stays between these values, the trade should do well. The main risk is if the stock drops below 92.
The initial trade set up has a delta of 2. That means the position is roughly neutral to start with. Note that this delta number can change significantly as the stock starts to move.
Exit Strategy For Enphase Stock Trade
In terms of trade management, I would look to close the trade if Enphase stock drops below 95 and I would take a profit if the trade was up around $50-$60 before the earnings date.
Closing before the earnings date will avoid earnings risk.
According to the IBD Stock Checkup, Enphase stock is ranked No. 8 in its industry group. It has a Composite Rating of 30, an EPS Rating of 66 and a Relative Strength Rating of 17.
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
