Free Option Trade of the Week – Sunny Outlook (FSLR)

March 5, 2024

Sunny Outlook

We’re headed back to the bullish side this week with a trade on First Solar (FSLR). The country’s largest solar module maker reported earnings on Tuesday after the bell. Earnings per share came in above estimates, while revenue fell short despite growing more than 15% year over year. The company guided earnings and sales that were in line with or slightly higher than the analyst consensus.

The stock jumped as much as 9% on the news before closing 3% higher. That’s in sharp contrast to other solar companies, which have been plagued by lower demand, high interest rates, regulatory changes and higher inventories. But FSLR managed to overcome those headwinds with stronger pricing power, something analysts see continuing in 2024.

The news was not met with any ratings changes, though there were a few target price increases. Depending on the source, FSLR’s average target price is in the $210-235 range, which is well above Friday’s $158 close. Given that the stock reached a high of $232 last May – its highest level in the past 25 years – these estimates may be a tad overexuberant.

My take on FSLR – based on the charts – is more conservative. The stock has gone nowhere in the past five months, travelling mostly between the 140 and 175 levels. The 20-day and 50-day moving averages, which have provided nothing in terms of support or resistance, are horizontal and of little use.

Given the positive earnings results and outlook, we’re looking for the bottom of this trading range continuing to hold at 140, a level the stock has closed below just seven times going back to October 2022. The short strike of our put spread is at 140, which is more than 11% below Friday’s close. Because we’re going so far OTM with this trade, the credit and max return are somewhat lower than most of our trades. Less risk, less reward.        

If you agree that the stock will continue respecting the bottom of its trading range, consider the following credit spread trade that relies on FSLR staying above $140 (blue line) through expiration in 7 weeks:

Buy to Open the FSLR 19 Apr 135 put (FSLR240419P135)
Sell to Open the FSLR 19 Apr 140 put (FSLR240419P140) for a credit of $0.90 (selling a vertical)

This credit is $0.05 less than the mid-point price of the spread at Friday’s $158.05 close.   Unless FSLR surges at the open on Monday, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $88.70. This trade reduces your buying power by $500, making your net investment $411.30 per spread ($500 – $88.70). If FSLR closes above $140 on Apr. 19, the options will expire worthless and your return on the spread would be 22% ($88.70/$411.30).