Capture Up to 70% a Year in Income From This Volatile Solar Stock
The solar industry has experienced a dramatic turnaround over the past few quarters. Less than a year ago, solar stocks were trading at multi-year lows, as overcapacity in the industry, a supply glut and negative profit margins depressed investor sentiment. Several key solar manufacturers were forced out of business, despite advances in technology that made solar power production more efficient.
But midway through 2013, the environment shifted as demand finally began to pick up, and the supply glut was ultimately absorbed. Energy policies in Japan were extremely helpful to the solar industry as the country began moving away from nuclear-generated power to renewable options.
Today, Wall Street analysts are scrambling to get ahead of the curve as solar manufacturers have begun to achieve positive gross profit margins. Just three months ago, analysts were expecting Trina Solar (NYSE: TSL) to post a loss for 2014, and now the company is expected to generate earnings per share (EPS) of $0.51. Similarly, EPS expectations for Canadian Solar (NASDAQ: CSIQ) have risen from $2.61 to $3.52, and loss expectations for JA Solar (NASDAQ: JASO) have been cut from $1.22 per share to just $0.18.
Out of all the solar companies, Yingli Green Energy (NYSE: YGE) caught my eye. The stock has been rebounding with the industry, and the shares have a significant amount of volatility. While YGE is still expected to post a loss of $0.31 per share this year, the company is experiencing healthy revenue growth and could be an attractive takeover candidate or a solid long-term investment on its own.
With a put selling strategy, this higher volatility works in our favor. As put sellers, we are able to collect significant option premium from volatile stocks, creating ample income while giving us a lower breakeven cost.
YGE is the ultimate volatility stock, having more than doubled from mid-August to mid-October, which was followed by a 50% decline through December. The stock has once again begun to rise and is currently trading just below $7 per share.
Today, we can sell the March $6 puts, which are currently trading near $0.67. This is a tremendous amount of premium when you consider the dynamics.
Selling these puts obligates us to purchase 100 shares at $6 for each contract sold if the stock is below that price on March 21. However, since we collected $0.67 in options premium, our net cost is $5.33, a 23% discount to recent prices.
We will need to set aside $600 — the $67 in income we received plus $533 or our own capital — in case shares are assigned.
On the other hand, if we sell these same puts against YGE today and the stock remains above our strike price, we can realize a very attractive level of income.
Assuming YGE remains above $6 through March expiration, we will realize a net profit of $0.67 per share. When you divide this by the $5.33 of our own capital that we set aside, you get a nominal return of 12.6% in 66 days. If you could repeat a similar trade every 66 days, we could generate a 70% rate of return per year.
Of course, to generate that level of income over the course of a year, we would need to be able to set up a similar trade each time our put option contracts expire. There is no guarantee the opportunity will continue to be available in March when the puts expire, but as long as the stock continues to exhibit high levels of volatility, we should be able to continue to set up attractive income trades.
I should note that YGE would not likely be considered the “best” solar investment idea, because many of its competitors have stronger business models with better long-term profit expectations. But because of YGE’s volatility, along with the positive trajectory for the entire industry, this company looks most attractive for traders selling puts.
Note: Using this same income strategy, my colleague Amber Hestla has scored 35 winning trades out of 35 so far. Her Income Trader subscribers have collected as much as $150,000 in income in the past year. See the results for yourself and learn more about this strategy by watching this special presentation.