Is solar power becoming a lucrative investment again? It seems like solar energy companies have taken a backseat to other, more exciting tech companies over the past few years. However, new energy policies may shift solar back into the… well… light of day.
Currently, solar power only provides about 1% of electricity in the US. However, it is by far the fastest growing major energy source in the country. As technology improves, it is very possible solar (and wind) power could replace fossil fuels as the leading source of electricity generation in the US in the next 10-15 years.
Here’s the thing…
What’s really got solar power investors excited these days is the potential for a tariff to be imposed on imported solar panels. The current administration believes cheap solar panels from foreign countries are hurting the effectiveness of US-based solar companies. As such, a tax on imported panels is being widely discussed as a way to improve domestic competition in the space.
Whether you believe in the use of tariffs or not, one certain consequence of a solar tariff is sales of US manufactured panels will increase. That’s why stock investors are snapping up shares in companies like First Solar (NASDAQ: FSLR), the largest solar company in the US.
As you can see from the chart, FSLR jumped over 5% on the news of a possible solar tariff. Like with many manufactured products, domestic solar companies have trouble competing with panels and other solar tech created in cheap labor nations, like China. Clearly, these companies would benefit from an import tax.
It’s also clear that stock investors believe the benefits of a solar tariff will aid companies like First Solar. But what do options traders think?
Apparently, options traders are not nearly so keen on FSLR’s upside as stock traders. On the same day the stock was up over 5%, 60% of the options trades in FSLR were bearish. In fact, the largest trade of the day was someone purchasing 3,000 October 20th 47.50 puts for $0.92.
That means, with the stock around $51, a trader dropped $275,000 to bet FSLR would be back below roughly $46.50 in the next month. That’s the level the stock was at before any of this tariff talk was taking place.
Why would options traders be so bearish on what appears to be good news for FSLR? First off, options traders can often be contrarian. They tend to take a more measured, longer-term approach to trade theories. While the idea of a tariff sounds good for US solar companies, who knows if and when it will be enacted. Remember the infrastructure spending promises?
My guess is the options crowd is fading the rumor, while the stock crowd is eager to front-run the situation. As an options guy, I normally side with the options traders, but who knows in this case. The stock may dip back down if there’s no movement on the tariff in the next week or so. However, if the tariff talk gains steam, the stock may keep going up.
The one thing I do believe is FSLR is highly unlikely to be sitting at $51 by October 20th expiration. And that’s why I like the idea of buying an options strangle trade here. For $350 you could grab one 50-52 strangle (buying both the 50 put and 52 call at the same time), which breaks even around $46.50 or $55.50.
Either breakeven level is plausible to get to within the next month. And, you don’t even have to guess who’s right between the stock traders and options traders.
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