First Solar (NASDAQ:FSLR) outperforms following upgrade

First Solar options strategies UBS upped its rating on First Solar FSLR Monday morning to buy from neutral, citing strengthening growth rates across the sector. The firm also lifted its price target on the stock to $150 from $136, allowing for almost 19% of additional upside from current levels.

UBS now estimates 2010 and 2011 global solar demand of 16.4GW and 19.2GW, nearly one-third higher than previous estimates. Growth is expected to be especially robust in France and Italy. Looking forward, the covering analyst upped his EPS estimate for First Solar for 2010 to $7.50 from $7.30 and lifted his 2011 projection to $8.80 from $8.00.

FSLR gained roughly 1% in Monday’s trading, outperforming the broader market, which suffered modest losses. This move lifted the shares above their 50-day moving average, but will the stock be able to hold above this trendline?

For investors who are either bullish or bearish on FSLR, we have outlined two moderate strategies below. Both are call spreads but one is a debit (bull) spread and one is a credit (bear) spread. Both are limited risk, limited return strategies. These are not trading recommendations, merely examples of different strategies for educational purposes. The prices are taken as of Monday’s close, when FSLR shares were trading at $126.29, up $1.26 on the day. For a full dissection of the strategies including profit/loss information, Bullish Option Strategy: Bull Call Spread

A long call spread could be an interesting strategy for those with an optimistic outlook in FSLR. The January 115/140 call spread can be purchased for a net debit of $12.30 (buying the 115 call, selling the 140 call). As the 115 call – the long call in this case – is in-the-money by roughly $13, this spread is near parity with the stock at its current levels.

The most this spread can lose is 100% of the premium paid, should the stock be trading below $115 when the calls expire. The most it can make, if FSLR is trading above $140 at expiration on January 21 of next year, is $12.70. This is the difference in strike prices minus the premium paid, and it represents a return on risk of 103% in less than five months.
Breakeven for this spread is $127.30; if FSLR is trading above this level when the options expire, the spread should theoretically be profitable. FSLR is currently just south of this breakeven level. All charts below are created with the profit/loss calculator tool in a virtual trading account.

Bearish Option Strategy: Bear Call Spread

Investors with a skeptical outlook on the shares could consider the opposite strategy – a bear call spread. This strategy is the subject of our weekly webinar series Two Traders, One Strategy. For more detail on this strategy, register now for today’s free webinar, which I’ll be hosting alongside Jared Levy (special contributor to OptionsHouse) after the close at 4:30 p.m. Eastern Time.

The First Solar September 135/145 call spread can be shorted for a net credit of roughly $1.42 (selling the 135 call, buying the 145 call). At expiration in 25 days, if FSLR is still below 135, the investor keeps this credit as the maximum potential profit.

The worst-case scenario is a move in FSLR above $145 at expiration. Maximum loss for this spread is $8.58 in this situation. The breakeven is $136.42, or the short strike plus the premium collected. This gives the stock more than 8% in upside wiggle room ahead of expiration before the spread moves into losing territory.

First Solar (FSLR) bear call spread
Photo Credit: Dominic Alves