Aggressive Income Play Could Land Traders 90% a Year
Don’t look now but the solar industry is finally showing signs of life!
Recent reports from solar panel manufacturers are pointing to a rebound in the industry as demand picks up and a massive supply glut is finally absorbed. For the last several years, the industry has been languishing under this supply glut as the crisis in Europe led to lower demand, causing inventories to pile up.
Today, demand from Japan and China has actually caught solar manufacturers off guard. Japan has made a dramatic shift from nuclear power to renewable energy. China has also increased purchases of solar power products to the point where many manufacturers are now unable to keep up with the demand.
The second-quarter earnings season was particularly insightful for investors as solar companies reported impressive shipment data and many of these manufacturers noted that they are now looking for opportunities to increase capacity. This is a dramatic shift from just a few quarters ago when manufacturers were worried about finding buyers for their finished goods.
Investors are catching on to this turn of events and a number of key solar stocks have begun trading higher. Considering the distance that these stocks have fallen over the past few years, and the acute level of bearish sentiment that has developed, the rebound in solar stocks could turn out to be dramatic and long term in nature.
Too many institutional and retail investors alike have written off this sector as dead. So a fundamental turnaround in the industry could take some time to be fully accepted by the investing public. And this means the stocks could continue to climb steadily as buyers reluctantly emerge and place their bets.
Today, I’m seeing an aggressive income opportunity on one of the strongest solar manufacturers that is showing healthy signs of a fundamental turnaround.
Shares of Trina Solar (NYSE: TSL) have been on the rise since the stock hit rock bottom in November of last year. Over the last couple of weeks, TSL has broken out of a consolidation pattern, and the stock is supported by a dramatic sentiment shift for the entire industry.
For the second quarter, Trina Solar announced shipments of 647 megawatts (MW), which represented a 54% increase over last year. More importantly, the company turned a gross profit margin of 11.6% — well above the 1.7% margin from the first quarter. Management increased guidance for the full year to an estimate of 2.3-2.4 gigawatts (GW) from a previous range of 2.0-2.1 GW.
The company is exploring opportunities for expanding its production capacity next year, so the shipment growth could very well continue for years to come.
As a result of the strong report and new guidance from management, analysts have been increasing their estimates and boosting price targets for the company.
It is very difficult for me to put a fundamental price target on the stock because it is still unclear exactly when TSL will actually post an accounting gain (when adjusted for expenses, depreciation, etc.). But the dramatic increase in the company’s gross margin, along with positive industry dynamics, should continue to boost investor confidence, and in turn, the stock price.
TSL is currently trading at $10.23, and I want to take this opportunity to execute a relatively aggressive income play. Today, we’re going to sell the TSL Oct 10 Puts near $1. (I would use a limit of $0.90 for the trade to make sure you get a good price.)
Selling these puts obligates us to buy the stock at $10 per share if TSL is below that price on Oct. 18, the option’s expiration date.
When we sell put contracts on a stock, we need to set aside capital to buy the stock in case the shares are assigned to us. Since we are receiving $1 per share, or $100 per contract, from selling the puts, we will only need to set aside an additional $900 per contract.
This trade could work out one of two ways:
1. If TSL remains above $10, we would not be required to buy the shares. In this instance, we would get to keep the $1 that we received from selling these puts, an 11.1% gain on the $900 in capital set aside in 45 days. If we repeated a similar trade every 45 days, we could net 90% a year.
2. If TSL falls back below $10, we would be obligated to buy the stock at $10. Keep in mind, however, that we received $1 from selling the puts. So our net cost would actually be $9, 12% below TSL’s current price. Given the strong industry dynamics and the turnaround story for the stock, I would be happy to purchase TSL at this discounted price.
Selling a basket of put contracts on various stocks that you would like to own is a great way to generate attractive levels of income in your account. It’s also a great way to accumulate a portfolio of quality stocks at discount prices.
Note: Using this same strategy, my colleague, Amber Hestla, has helped her Income Trader subscribers collect a minimum of $1,873 this year. Readers are easily scaling up to make $6,000… $19,500… even just under $150,000! Click here to learn how you, too, can start making this Instant Income.