Enphase Energy (ENPH) has done very well in the midst of a bear market this year and is currently going strong near a point of purchase. According to Check IBD StocksEnphase stock ranks No. 1 in his group.
In addition, the firm has perfect solar inverter and battery storage Composite Rating of 99, likewise perfect EPS rating of 99 and a star Relative Strength Rating of 98.
Enphase stock is above its 21-day exponential moving average, as well as its 50- and 200-day moving averages. Therefore, let’s consider trading in the form of placing a bull spread.
As a reminder, a bull spread is a defined risk strategy, so you always know in advance what the worst case scenario is.
This type of trade will turn a profit if ENPH trades sideways or higher – and even sometimes if it trades slightly lower.
Enphase Stock: Focus on December Options
With Enphase stock trading just below 320, if we use put options to expire on December 16th, we can sell a put option at the 300 strike price and buy a 295 put at about $1.60.
Selling this spread would generate approximately $160 in premium with a maximum risk of $340.
If the spread expires worthless, the trader gets a 47% return in 3-1/2 weeks, provided shares float above 300 at expiration.
The maximum loss? If Enphase stock closes below 295 on December 16, the seller would lose a $340 premium on the trade.
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Break even point
The break-even point for the trade stands at 298.40. You can calculate this as 300 minus the $1.60 option premium per contract.
I would stop loss if Enphase stock falls below 305. Otherwise, another good rule of thumb? Limit the loss to the amount of the premium received, which in this case was $160.
Sticking to this stop-loss level will help avoid big losses if the trade goes south.
EPNH is not due to report earnings until January, so there would be no earnings risk with this trade.
Please remember that the options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes that patience waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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