$ENPH Bullish Earnings Play
Updated
I trade almost entirely using options, shares are typically only there to hedge Greeks or if a stock has a terrific opportunity to sell covered calls. When you are trading in options you need to understand that while technical analysis and fundamental analysis are still important, what is usually most important is how the options chain looks-- what is the Implied Volatility curve, the skew/smile, and etc. This is primarily why Earnings present such an incredible opportunity because people throw money all over the place betting on some kind of move, and usually over pay. So note that this play is less about Enphase Energy as the company or what support/resistance levels I see and etc, its more of a "This is a killer value" option spread.
Background
Enphase is a solar energy stock. Solar stocks and electric vehicle (EV) stocks as well as some others have been really beat up recently but I've been seeing a ton of reversals which lead me to believe another "trash flash" rally has just begun. Looking at
IWM or UUS2000 you can see a wedge or sort of diamond top has broken through to the upside.
Technical
My bottom pane has my Price Action Index indicator, which shows a breakout to the bull side already underway on this stock. You can see that on the Bollinger Band as well-- it was squeezed in consolidation and now the band is expanding in size as the stock hovers above the top band.
Options Analysis
There are some levels of resistance above that I think this stock can go through pretty easily until it gets to that $190-$210 cloud. This is so obvious that options traders have attacked OTM calls for near-term expirations pretty aggressively. Here is a (crude) diagram of the
ENPH smile graph for this Friday’s expiration--
This smile is called a “forward skew”. Note that it is INSANELY weighted towards the bullish side. Options traders are pricing in the potential for a giant move up. Therefore, we try to exploit it. As this near-term 4/30 expiration has priced in OTM calls very expensively, the next expiry afterwards, 5/7 has about 20% lower IV At The Money, and OTM we’re looking at about 25% less IV. It looks like this:
This spread is affectionally dubbed the “Poor Man’s Covered Call” but it is simply a Diagonal Call. It is somewhat similar to being long shares, however I want to limit my risk to the downside and not get stuck holding shares for a long time.
What is really nice about this setup is you have ALL of the Greeks working with you! I am positive Delta, very positive Theta, a smidge positive Gamma, positive Vega, and even positive Rho (not that that matters much here).
Past Earnings
What I love about this earnings play is that of the past 12 earnings reports Enphase has had, only 2 have had a move to the downside. The other 10 have all been positive-- +1.0%, +4.2%, +8.8%, +9.5%. +9.5%, +14.0%, +18.7%, +29.3%, +30%, and +42.4%. A move up to $220 is not out of this realm of possibility. But all I am looking for is a move up that is at least 2.0% or so. And the beautiful thing is that the Average Move of the last 12 earnings comes out to +/- 16.6%, which would be about $201.
Trade Entry
I got my spread filled at a $1.98 debit. I put my walk limit order in and started working on this idea and got filled there. I am plenty fine with that fill but if you are patient the Bid-Ask spread is currently $1.72-$2.33 with a mid of $2.03. From my personal experience, getting filled can be a tedious process because I want the best possible price but I also hate being too cheap and watching a good trade pass me by. In the end a nickel or dime difference on the fill is not the killer, it is the trade not working.
Best of luck. Let me know if you have any thoughts or ideas or are playing this as well. EARNINGS ARE TOMORROW/TUESDAY AFTER MARKET CLOSE!
Please remember that this is NOT financial advise and I have no certifications or qualifications to give financial advise.
Background
Enphase is a solar energy stock. Solar stocks and electric vehicle (EV) stocks as well as some others have been really beat up recently but I've been seeing a ton of reversals which lead me to believe another "trash flash" rally has just begun. Looking at
IWM or UUS2000 you can see a wedge or sort of diamond top has broken through to the upside.Technical
My bottom pane has my Price Action Index indicator, which shows a breakout to the bull side already underway on this stock. You can see that on the Bollinger Band as well-- it was squeezed in consolidation and now the band is expanding in size as the stock hovers above the top band.
Options Analysis
There are some levels of resistance above that I think this stock can go through pretty easily until it gets to that $190-$210 cloud. This is so obvious that options traders have attacked OTM calls for near-term expirations pretty aggressively. Here is a (crude) diagram of the
ENPH smile graph for this Friday’s expiration--This smile is called a “forward skew”. Note that it is INSANELY weighted towards the bullish side. Options traders are pricing in the potential for a giant move up. Therefore, we try to exploit it. As this near-term 4/30 expiration has priced in OTM calls very expensively, the next expiry afterwards, 5/7 has about 20% lower IV At The Money, and OTM we’re looking at about 25% less IV. It looks like this:
- $200 Call for 4/30 has an IV midpoint of 120
- $195 Call for 5/7 has an IV midpoint of 90
This spread is affectionally dubbed the “Poor Man’s Covered Call” but it is simply a Diagonal Call. It is somewhat similar to being long shares, however I want to limit my risk to the downside and not get stuck holding shares for a long time.
- If it does backfire by a lot then that means my long calls will go worthless
- If the stock doesn’t move at all from earnings, I make the decision of: rolling my short calls to my long date (5/7), buying to close the short calls after they’ve been IV Crushed and hoping for some upside to come later, or taking a small loss (say $200-400)
- If it goes mildly up, I make a mild profit
- If it hits $200 there and expires at that price, I take my maximum profit: my choice of closing the spread then, holding my long call (I would probably roll another short one against it)
- If ENPH does some insane move over 3 standard deviations into the moon, say $240, I still make profit but that short $200 call digs at it (I have more extrinsic/time value with my option being 1 week further to expiry than the short one does)
What is really nice about this setup is you have ALL of the Greeks working with you! I am positive Delta, very positive Theta, a smidge positive Gamma, positive Vega, and even positive Rho (not that that matters much here).
Past Earnings
What I love about this earnings play is that of the past 12 earnings reports Enphase has had, only 2 have had a move to the downside. The other 10 have all been positive-- +1.0%, +4.2%, +8.8%, +9.5%. +9.5%, +14.0%, +18.7%, +29.3%, +30%, and +42.4%. A move up to $220 is not out of this realm of possibility. But all I am looking for is a move up that is at least 2.0% or so. And the beautiful thing is that the Average Move of the last 12 earnings comes out to +/- 16.6%, which would be about $201.
Trade Entry
I got my spread filled at a $1.98 debit. I put my walk limit order in and started working on this idea and got filled there. I am plenty fine with that fill but if you are patient the Bid-Ask spread is currently $1.72-$2.33 with a mid of $2.03. From my personal experience, getting filled can be a tedious process because I want the best possible price but I also hate being too cheap and watching a good trade pass me by. In the end a nickel or dime difference on the fill is not the killer, it is the trade not working.
Best of luck. Let me know if you have any thoughts or ideas or are playing this as well. EARNINGS ARE TOMORROW/TUESDAY AFTER MARKET CLOSE!
Please remember that this is NOT financial advise and I have no certifications or qualifications to give financial advise.
Note
So the immediate price reaction to earnings was a bust. I did not spend much time assessing what happened but it sounds like despite earnings mostly being a 'beat', guidance on future revenue was not particularly exciting.This idea did not gather many views or follows but for the sake of anyone following along, and to plan for trade exit out loud, here's what I am thinking for tomorrow morning (assuming no miraculous recovery in premarket)--
Implied Volatility is likely to crush to the tune of 30-35% for 4/30, maybe 20-30% for 5/7.
The short $200 call is likely to be trading somewhere between $0.01 and $0.10, my best guess would be it can be bought to close for $0.03 or about $15.
The long $195 call is likely to be trading for $0.13-$0.46 and could be sold maybe for $150. This would mean I can close my spread for maybe $135, in line with the predicted $865 loss at this price.
Let's think more optimistically for a moment. Suppose the market opens up, we buy to close that short $200 call for $15 and price runs up to $170. We might be able to sell our long call for $0.7-$0.9 and get $350-$450 back, calling it roughly a $600 loss on this trade. Shy of that miracle +26% move in the morning, that would be the best possibility.
Remember to always keep risk management as YOUR #1. A $600-$1000 loss is tolerable for me and the potential of the reward was well worth the risk.
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