Solar’s Volatility Presents an Opportunity to Capture 40% a Year

Trina Solar (NYSE: TSL) is staging an impressive turnaround. In 2013, the company posted a loss of $1.09 per share, its third consecutive year of losses as it struggled with excess capacity and plummeting prices for solar modules. While lower prices have been a tremendous boon for consumers and helped drive the adoption of solar power, they have made life difficult for solar manufacturers with heavy overhead expenses.

Trina’s stock price suffered alongside the company’s challenging fundamental prospects, dropping from a high above $36 in 2007 to a low below $3 in just over a year. The stock has been extremely volatile since then as well, rallying back above $30 in early 2010, before once again falling into the low single digits in 2012. To be sure, the solar business is not for the faint of heart!

TSL Stock Chart

On Monday, TSL broke out of a near-term consolidation following news that the company landed a new supply agreement in China’s Jiangsu Province. While pricing terms for the deal weren’t disclosed, the news is certainly bullish.

As TSL brings its costs in line while growing its sales channels, analysts are now forecasting a profitable year in 2014, with consensus expectations for earnings of $1.11 per share.


With shares trading near $13, TSL is currently valued at roughly 12 times this year’s expected earnings and less than 10 times next year’s estimates. This is an attractive level for a company that is returning to profitability and expected to grow earnings by 24% in 2015. Given the company’s prospects and the stock’s history of volatile performance, I wouldn’t be surprised to see a continued sharp rally as investors become more comfortable with analyst projections.

Speaking of volatility, the wild gyrations in the stock price have helped to push option premiums to very high levels. We can take advantage of the bullish prognosis for Trina and the high option premiums by setting up a covered call trade.

To enter this trade, we will start by purchasing TSL at the market price in 100-share lots and selling one TSL Oct 13 Call for every 100 shares purchased. The stock is currently trading at $13.06, and we can sell the option for about $1.29. This makes our net cost $11.77, and I like this trade as long we can enter it for a cost basis of $12.20 or below.

If the stock trades lower, our losses are relatively well hedged. With a net cost of $12.20, the stock can fall 6.6% before reaching our breakeven price. 

If TSL is below the $13 strike price at expiration on Oct. 20, the call options will expire worthless and we will continue to hold the stock. Here, the option premium represents our profit on the trade, and we will have the option to sell our stock or to hold and potentially sell additional call contracts. Assuming option premiums remain relatively high, it may make sense to sell December calls for more income.

If TSL remains above the $13 strike price, our shares will be called away at this price. Since our net cost was $12.20, our profit will be $0.80 per share, or 6.6% in 59 days. This works out to a 40.6% per-year rate of return.

This is the best-case scenario for our trade, but while we are giving up some potential profits due to our obligation to sell shares at $13, our rate of return for the time period is still quite lucrative.

One thing to keep in mind is that Trina is scheduled to report earnings on Aug. 26. Given the company’s current transition toward profitability, this is an important reporting period. Analysts are currently projecting EPS of $0.14. 

The uncertainty ahead of the earnings announcement is at least partially to blame for the relatively high level of premium in the call options. Therefore, if you are going to enter the trade, it is important to get your position set up before the announcement is made.

Note: Selling covered calls is like collecting “rental income” on the stocks you own. If you’re not renting out the stocks in your portfolio, you may be missing out on the easiest income around. See how you can collect $1,200 or more each month by clicking here.