Solar stocks have rallied as the Trump administration clarified clean energy tax credits, easing concerns that policy changes would be harsher than expected.
For investors who believe the industry may finally be turning the corner after a multiyear slump, a bullish options strategy on the Invesco Solar exchange traded fund could offer a shining opportunity.
The Invesco ETF provides diversified exposure to the solar sector, holding 38 stocks in total. This allows investors to participate in the broader performance of the industry rather than rely on the fortunes of any single company.
Buying And Selling The Bull Call Spread
In constructing a bull call spread, an investor buys a call option while also selling a higher strike call option. In the case of the Invesco ETF, shares currently trade around 41. The ETF is also clearing a 40.35 entry point in a saucer with handle.
So, investors might consider a bull call spread by buying a 45 call while selling the 50 call on the Nov. 21 expiration.
This trade currently goes for a debit of around $1. This also coincides with the maximum loss of $100 per set of contracts an investor will experience if shares of the ETF are under 45 on expiration.
The maximum profit is the width of the strikes minus the debit paid, or roughly $400.
Investors will realize this maximum profit if shares trade above 50 on expiration. That 50 level is the same as the current profit zone for shares of the Invesco ETF.
Solar Stocks: Defined Risk And Reward
The advantage of this call debit spread is that it has a defined risk and reward, which is favorable to investors. The downside is that the spread is currently out of the money. If the solar stocks ETF remains flat then, on expiration, investors will lose the full premium on the trade.
The recent moves higher confirm a break in a long-term downward trend from when the ETF reached a high in early 2021. Investor's Business Daily's solar energy group currently ranks 29th out of 197 industries followed by IBD.
Steven Bell is a writer and trader based out of Vancouver, British Columbia. He is also a contributor to IBD's Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.
