First Solar, Inc. (NASDAQ:FSLR) received some strong confirmation both off and on the price chart this past week. For bullish investors looking to hop on board FSLR stock, a modified fence strategy is an attractive way to bet a sizzling price trend will continue, but with less risk. Let me explain.
An analyst change sparked a rally in FSLR stock this past Friday. Shares finished up a bit more than 4% following Deutsche Bank’s upgrade from hold to buy and price target lift from $50 to $65 on an improved outlook for the U.S.-based solar giant.
Backing the bullish recommendation change, analyst Vishal Shah cited stronger solar-module prices backed by solid demand in the U.S. market, successful product development and an improving favorable regulatory environment.
What’s more, First Solar’s staunch support off the price chart has equally strong backing from FSLR stock, which has been on fire this year and looks ready to heat up again.
FSLR Stock Weekly Chart
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Looking at the extended weekly chart of FSLR stock, it hasn’t always been puppy dogs and rainbows for bullish investors. Nevertheless, 2017 has become an increasingly strong and bullish turnaround situation. And in our technical view, FSLR isn’t nearly done with this trend.
Backing this belief and speaking of trends, First Solar’s bullish uptrend has, by some measures, only just begun. The price chart in FSLR stock is showing a couple higher highs and higher lows from the April bottom which confirms an emerging uptrend is now underway.
FSLR’s bullish situation also received a solid show of support this past Friday. Shares of First Solar staged a powerful breakout from a two-month-long triangle pattern breakout which had been coiling around the 50% resistance line.
From here, the expectation is FSLR has 10% of upside before a test near $55.50 challenges the 62% resistance level. A successful clearance of Fibonacci resistance would then put shares on a trajectory to recapture the early 2016 high of $74.29 a share.
FSLR Stock Modified Bullish Fence
In our last at bat in FSLR we proffered the Sep $42.50/$45 bull call spread priced for around 80 cents as a favored strategy. With expiration this week the spread is fully in-the-money and ready to capture its max profit of $1.70. Nice!
After reviewing the current option prices in First Solar, a roll adjustment is a favored strategy to continue profiting from a resumption of the rally to new highs. The position can also be used by bullish investors looking to enter afresh into FSLR.
Specifically and with FSLR at $49.12, the combination of buying the Nov $55/$57.50 bull call spread and selling the Nov $45/$42.50 put spread for up to a 10-cent debit looks attractive.
With this position, shares need to rally in order to profit. The real sizzle is if FSLR can trade into and then above the bull call vertical spread as a max profit of $2.40 would be realized at expiration.
During the life of the modified fence, if FSLR rallies, paper profits below $55 can accrue as the combination is long deltas or directional risk. Failing that, if First Solar is stationed below the call spread at expiration, the 10-cent debit will result in a small loss.
On the downside, if shares of First Solar falter and trade lower, the strategy provides nearly 11% of buffer or protection, sans the 10-cent cost to enter the position. That’s not a bad trade-off, right?
Below $45 in FSLR stock and more significant losses will begin to build for this modified fence. But here too, the spread is fairly attractive.
Ultimately, the combination’s max risk is limited to $2.60. As that type of loss would also require a drop of nearly 16%, a complete breakdown of weekly pattern support. Given that this trader’s risk exposure is the equivalent of just 5% of FSLR stock, the net benefits, up or down are, in our opinion, easy to appreciate.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
