After previewing SPWR, here are a couple trades that looked interesting to us depending on the view and position.
For Those Interested in Getting Long at Lower Prices and/or playing for breakout above 30:
If you have no existing position but like the long-term story, you can take advantage of the high implied volatility ahead of the earnings event to initiate a bullish structure that does not lose money unless the stock goes below the $22 level (50 day moving average is 21.70). This structure is only appropriate for those willing to actually own the stock there.
Sept Call Spread Risk Reversal:
- Sell 1 of the Sept 22 Put at $1.00
- Buy 1 of the Sept 30 Call for $2.15
- Sell 1 of the Sept 34 Call at $1.15
This structure is for no premium, and you can make up to $4 between 30 and 34, and make the full $4 at 34 or above. The trade is flat between 22 and 30, and starts to lose money 1 for 1 with the stock below $22. I view this as a much better way of getting long exposure for a squeeze higher than being long the stock outright and the risks that entails, especially given the strong run that it has had.
For Those Neutral, to play the range:
SPWR’s short-term technical support is around $23, while its 3 year high is the stock’s high yesterday, at $28.15. The midpoint of that range is around $25.60. The Aug 29/26/23 Put Fly is priced around $0.73, with break-evens at 23.73 and 28.27. Max gain is $2.27 at $26.
Aug 29/26/23 Put Fly:
- Buy 1 of the Aug 29 Put for $2.98
- Sell 2 of the Aug 26 Puts at $1.39 each ($2.78 total)
- Buy 1 of the Aug 23 Put for $0.53
This structure is basically selling the implied move and a bet that it’s overpriced. The risk is obvious, 73c and you lose all if the stock breaks out to new highs or re-visits its 50 day moving average below.
For Those Long, Looking for Protection:
SPWR has rallied from near $5 to near $30 in 2013. For any smart enough to be long, here is a good structure for protection ahead of the event.
Pay $0.17, sell the Aug 30 call, buy the Aug 27/23 put spread, protection between 26.83 and 23, gains capped above 29.83:
Aug Put Spread Risk Reversal:
- Sell 1 of the Aug 30 Calls at $1.20
- Buy 1 of the Aug 27 Puts for $1.87
- Sell 1 of the Aug 23 Puts at $0.50
This structure is for very nervous longs that think a pullback would both be healthy and very possible on earnings. Protection starts almost immediately on the downside. The sacrifice is that you are called away in your stock if the stock gaps up above 30 on the report.