Name That Trade: It Aint Solar Day Today Is it? $TAN, $SPWR, $SUNE

by Dan June 16, 2014 2:37 pm • Commentary

Earlier, I highlighted the technical situation in solar panel provider SCTY (here) and concluded that the stock could be an inflection point as it has seen declining momentum and failed to make a higher since its breakdown at $70, but the relatively low implied volatility in SCTY options could set up for a decent trade as other solar stocks like FSLR, SPWR and SUNE are either breaking out or look poised to do so.

SPWR, a stock that has 22% short interest, and a high concentration of ownership (French oil company Total owns 60% of the shares outstanding) sets up a lot like SCTY with a low float, high short interest and prone to squeezes.  SPWR today is making a new 52 week and 5 year high and options volume is running hot at almost 4x avg daily volume with the June 38 and 36 calls most active.  Today’s breakout of the consolidation that the stock has been in since October is a technician’s dream:

SPWR 1yr chart from Bloomberg
SPWR 1yr chart from Bloomberg

Its also worth noting that the relative strength indicator (RSI) on the bottom panel, while getting near-term overbought, is not flashing any warning signs yet.

While options prices are high relative to most other sectors in the market, they are reasonable considering the long period of hibernation the stock has been in for those looking to make directional bets.

SUNE is also seeing considerable options activity today. The largest trade today is a very bullish roll where a trader sold 32,000 July 20 calls @ 2.0875 to close and bought 45k July 22 calls for 1.18 to open. This activity has been fairly prominent in this stock for months now where a large investor has been rolling up calls as the stock hits his strike.  Total options volume is running 6x average with calls outnumbering puts 5 to 1.  SUNE has also been consolidating like SPWR over the course of the last few months, but over a much wider band making options in the stock considerably more expensive on a relative basis (60 vol vs SPWR at 46).  

Anyway you look at it, solar stocks have caught a bid. Stocks like FSLR and SPWR trade at reasonable valuations, stocks like SUNE are backed by serious options activity and some stocks like SCTY are merely hanging on due to its association with Elon Musk.

For a trade we would probably be more inclined to play SCTY from the long side, as an investment FSLR probably has the most reasonable valuation relative to its existing business and growth prospects, and SUNE is probably the most interesting from a speculative standpoint given the relentless call buying.

The moral of the story is that not all bullish themes in high short interest sectors like Solar are created equal, but anyway you slice it there is some fairly interesting action in the space that has us taking a closer look.