Bullish and Bearish Option Strategies for First Solar (NASDAQ:FSLR)

Bullish and Bearish Option Strategies for First Solar <span class= FSLR " src="http://farm3.static.flickr.com/2178/2087872586_af490a7e28_m.jpg" alt="" width="260" height="170" />Thursday morning, Credit Suisse lifted its rating on First Solar FSLR to “outperform” from “neutral,” which is essentially raising a “hold” rating to a “buy.” The firm also bumped the 12-month price target to $150 from $110.20.

Credit Suisse analysts expressed that the upside in pricing for the second and third quarters has not yet been reflected in the stock’s price. This suggests roughly 20% of upside from current levels. The Street appreciated this vote of confidence, sending the stock up more than 4% against the backdrop of an uninspired market.

FSLR dipped along with the broad market over the past several weeks, losing 34% of its value from its April 29 high to its June 8 low. In the past week-and-a-half, however, the shares have attempted recovery, tacking on more than 20%. Thursday’s gains boosted the shares above their 50-day moving average.

Investors who want to jump on the bull side of FSLR might find the stock’s price tag a bit off-putting – 100 shares currently costs nearly $12,400. The typical requirement of less initial capital is one reason traders have continually flocked to the option markets, whether they are bullishly or bearishly inclined. Two option strategies on FSLR – one bullish, one bearish – are detailed below. Remember these are hypothetical examples, not recommendations. Consider your risk/reward parameters and trading goals before executing any new trades.

Want to learn more about different options strategies or the OptionsHouse platform? Stop by our events page to review our schedule of free weekly webinars and sign up for one that interests you. Next week’s strategy webinar is a look at the risks and rewards of long puts.

*Prices given as of Thursday afternoon. FSLR was trading at $123.71

Bullish Option Strategy: Synthetic Long Stock

Those investors with a strong bullish outlook but who would rather not commit $12,400 to FSLR could consider a synthetic long stock, which has the same risk/reward profile as a long stock without the commitment of capital upfront. By selling the December 125 put and buying the December 125 call (both near-the-money), the investor collects a modest credit of $2.30 (in contrast to paying $12,400 for the shares). As the stock moves higher, this spread should move higher; the opposite is true should FSLR decline.

At expiration on December 17, the breakeven price is $122.70 (the strike price minus the credit collected). Anywhere above this level is profitable and anywhere below this level is a loss, all the way down to zero (the maximum loss is capped at $122.70). One drawback to this strategy (in general) is that options do not pay dividends like stocks do, but First Solar does not currently distribute a dividend.

Profit/Loss of First Solar (FSLR) synthetic long stock

Bearish Option Strategy: Long Put

Investors who think First Solar’s latest burst of strength won’t last (or who have doubts about the future of alternative energy) could buy long-term puts in hopes of future downside. The near-the-money January 2011 125 put is currently priced at $19.70 (which is the maximum the long put buyer can lose if the shares fail to drop). The maximum gain, theoretically, is capped at the strike price minus the debit paid (as obviously the stock cannot drop below zero).

Breakeven at expiration is $105.30, but the put buyer may choose to sell the position to close at any time between purchase and expiration if movements in the stock or in implied volatility change the value of the contracts.

Profit/Loss of First Solar (FSLR) long put