Name That Trade – $SCTY : Solar Flare

by CC July 26, 2013 3:32 pm • Commentary

Enis got the solar industry on our radar a few months ago with this piece. His point, which I agree with is that the solar industry is on the verge of mainstream, and like the dot-com bubble and its aftermath, it’s just a matter of figuring out who the winners and the losers will be. Because, if it really is becoming mainstream, the winners will be big winners. To that point, here’s Enis:

Sounds to me like another “hot” industry where investors were just too early, but the long-term story is as attractive as ever. This theme of course hit my radar because of the recent excitement in the solar space, most notably in FSLR.  But in the long run, the real key will be picking the winners from the solar industry’s rubble.  Previous internet fallen angels like JDSU and JNPR never made much of a move, while AMZN and PCLN now trade at multiples of where they traded in 2004 or 2005.

Coincidentally, almost immediately after that post a couple of the solar names we had our eye on began to rip to the upside, even getting a mention in a post a few weeks later by Enis on missing out on sectors we like because we wanted a pullback that never came:

Specific examples?  I’ve been a bull on the solar stocks, but have had only a minimal position, waiting for the deeper pullback that never came.

Just because I want to add insult to injury on Enis having been right on these names but unable to pull the trigger, here’s a post a few weeks later on a specific name we had our eye on, $TAN:

I agree that the $20-$22 area would be the spot for a nice entry.  The real question mark in my mind is if we make it back there to get that entry.  In any case, I added TAN to the top of my watchlist to make sure I don’t miss it if it does hit my target area.

About 2 weeks after that post TAN got down to 22 and bounced hard, with the stock now just below 28:

Screen Shot 2013-07-26 at 12.11.00 PM
from LiveVol Pro

So TAN was a name we liked, and another one has been SCTY, a solar leasing company that is in a good spot in the industry due to the fact that falling prices of solar panels is likely a net positive for the leasing companies as opposed to the manufacturers. Around the time we began discussing the industry, I answered a question from a subscriber about the upfront costs of installing solar residentially and whether that was the big overhang on the industry, as it has been in the past. Here were my thoughts:

I think it all depends on whether these falling prices continue (like Moore’s law for microchips) as consistently as they have over the past few years. It’s also very difficult to predict the winners and losers because of all the different business models of all these companies. Obviously falling prices of panels are brutal on the bottom line of the producers, but great for the “leasing companies” as one of the biggest trends is leasing so that there are no upfront costs to recoup for the consumer. One of things that’s fascinating to me though is that solar and the nat gas boom actually could start a feedback loop that actually drives other sources to be more expensive and is really devastating to the Utility companies. Here’s an article talking about some of these disruptive companies with solar and direct nat gas lines that are a threat to the utilities, even has quotes from Duke Energy on the threat:

SCTY has been our radar for these reasons, and it doesn’t hurt that Elon Musk of SpaceX and TSLA fame is involved with the company, from a publicity and branding perspective. We’ve liked TSLA for some time now and got in and out of the name, waaaay too early.

Trade Update $TSLA – Taking Profits On This Move, Will Revisit Later

9:54 am EDT – April 12, 2013

Action: Sold the TSLA ($44.60) June 42 / 47 Call Spread at $2.10 for a $0.70 gain


TSLA is up about 85 dollar since then. We never revisited. So it goes.

But let’s not pretend these speculative names in speculative industries are easy. SCTY currently sits on its 50 day moving average of 40 after a pullback from the Elon-Mania highs of about 52. And it’s due to report earnings on August 7th. It could easily complete a roundtrip back town to the low 30’s if the report contained any grenades:

Screen Shot 2013-07-26 at 12.37.31 PM
from LiveVol Pro

But these solar names tend to have high short interest and SCTY is no different with about 15% of the float on the short side. If those short sellers get caught offsides and SCTY does impress investors/speculators, there’s no reason why a move to the upside couldn’t get crazy.

With that in mind, we wanted to look at some options structures that could be there for a breakout to the upside but without risking a ton of premium in case SCTY disappoints and breaks down. We also wanted to give ourselves some time for it all to play out, so we didn’t want “an earnings play.” So we looked out to January. Here’s the type of trade we’ll be looking to enter in the next few days. The stock is about a dollar higher since I started writing the post. Ideally we’d like an entry as close to 40 as possible. It’s not a huge delta right now but we’ll try to time it as well as possible:

Trade – SCTY (40.50) Bought the Jan’14 45/60/75 call fly for 1.90
  • Bought 1 Jan’14 45 call for 5.80
  • Sold 2 Jan’14 60 calls at 2.60 (5.20 total)
  • Bought 1 Jan’14 75 call for 1.30

Breakevens on Jan Expiration: Below 46.90 lose all, above 46.90 and below 73.10 make between 0 and 13.10 with 60 in the stock max profit, losses above 75 in the stock.

Rationale: This is a highly speculative trade in a highly speculative name and could easily lose the entire cost of the trade. However, the structure has a massive range to the upside in which it is profitable and could make a multiple of its cost if the stock makes new highs.