While I agree with Rodney about staying away from risky bonds like those SolarCity have on the market, I think the future of solar is bright.
The industry as a whole has just started to gain traction and the growth potential is enormous.
Put it this way: If SolarCity (NASD: SCTY) was able to capture just 1% of the U.S. electric utility market – worth more than $370 billion annually – the company would be able to increase its sales by 26-times.
Most companies aim for single-digit sales growth from year to year, so the prospect of a 2,600% increase is a game-changer for investors willing to stick their necks out a bit.
And stick it out you must…
The volatility in newly emerging industries, and the start-up companies that scramble for early entry, is quite high. And it makes traditional buy-and-hold stock strategies very difficult to follow.
SolarCity’s stock has been no exception, proving rather volatile in its first year of trading. Its weekly volatility has averaged nearly 9%, relative to the 0.5% for the S&P 500.
Here’s a chart of SolarCity’s stock price since its December 2012 debut…
That volatility represents risk to buy-and-hold investors. Yet, it can also be turned into cash payouts for savvy options investors willing to sell puts against SolarCity’s stock.
Here’s how that would work…
Looking at the chart above, $40 a share seems to be a good level to buy shares of SolarCity. The problem is, you can’t buy shares for $40 today. You’d have to pony up about $51 a share.
Instead of waiting for a pullback to $40 (which may or may not ever happen), a short put strategy allows us to generate income over the next five months and gives us the opportunity to buy SolarCity stock for $40, if it drops that low.
Selling the April 19, 2014, $40-strike put option on SolarCity would net about $380 per contract, based on today’s market prices. This $380 would be earned “free and clear” assuming SCTY closes above $40 a share on April 19, 2014.
$380 earned on SolarCity’s $51 a share stock price equates to a yield of 7.5%, or 18% on an annualized basis. Clearly, that’s a better yield payout than SolarCity’s 4.8% bonds!
Alternately, if SCTY closes below $40 a share – the strike price of the put options I’ve highlighted – then you’d likely be required to purchase shares of SolarCity stock, for $40 a share. (You’d need to buy 100 shares of stock for every put option contract you sold short).
This scenario is good too, as there is a strong support level just below $40 a share and I’d be happy buying at this level.