Last Week's Income Report: July 19th, 2021
Last week was a choppy one for stocks. Investors weighed a higher-than-expected inflation reading against a Fed that promised to remain accommodative and a surprise increase in retail sales.
The S&P 500 closed the week down 1%. One sector that was hit particularly hard was clean energy.
The iShares Global Clean Energy ETF (ICLN) dropped nearly 5% last week. This was due to a number of factors, including a general sell-off in growth stocks and falling fossil fuel prices.
Despite this, Options Income Blueprint members booked their second profitable trade in home solar system provider Sunrun (RUN). Traders who sold just one contract earned $75 in income.
That brings our total income so far in July to $238. Here’s a quick rundown of July’s winners:
Sunrun is a new addition to the Options Income Blueprint universe. We traded it for the first time last month.
I recommended our most recent trade on RUN in late June. The stock only has monthly options, so we sold a July put for a big chunk of cash.
With shares trading at $57.83, we sold the RUN Jul Monthly (7/16) 55 Put for $2.35, or $235 per contract.
The day we put on the trade, RUN hit a high just below $60 and then turned lower, closing the day 5% off that high. A brief recovery in shares was followed by more selling that caused our put option to go into the money.
Less than a week and a half after we put on the trade, RUN had cratered nearly 18%. That’s a scary drop, but we had a few things going for us.
First, we have experience trading clean energy names and know they are more volatile than your average stock. Sharp moves down are often followed by equally strong reversals.
Second, those elevated volatility levels translate into elevated option premiums. As I mentioned, we were able to generate $2.35 in income for an option that was less than three weeks out. Collecting such a large amount of premium gives us added flexibility when managing the trade, whether that entails booking profits early or rolling the position.
Finally, we had time on our side for shares to recover given that the option was not set to expire until July 16.
As it happened, RUN managed to run back up. By Tuesday it was approaching our $55 strike price.
When it comes to selling options, traders should never be afraid to take profits off the table, nor look a gift horse in the mouth, especially when it comes to volatile stocks like RUN. Plus, it was clear clean energy stocks were struggling, and I wanted to close out the trade rather than having to potentially roll out to August (remember that RUN only has monthly options).
So, with the stock at $54.81, I recommended members buy back the put they sold for $1.60. That may seem like a lot of cash to give up, but we still exited the trade with a profit of $0.75, or $75 per contract.
That means we earned a 1.4% return over the $5,500 in capital we allocated to the trade. And since the trade was open for 15 days, our annualized return was 33%.
Not only is that right around our target return for put-selling trades, it turned out to be the right move.
By the time this option would have expired, the stock had dropped to $46.35. So, had we stayed in the position, we would have been forced to roll out another month or had to accept shares with the stock trading significantly below our strike price.
I’m happy with how the RUN trade worked out. However, the sell-off in clean energy stocks also hit our positions in First Solar (FSLR) and General Motors (GM).
While it may sound strange to call GM a clean energy stock, Wall Street is increasingly valuing it as an electric vehicle stock rather than a traditional automaker.
Both GM and FSLR sold of sharply last week, prompting us to roll to avoid assignment. But I expect this downturn will be short-lived.
When trading clean energy stocks, it’s important to put fundamentals first, not charts. Demand for solar energy and EVs is only going to increase. And First Solar and General Motors are excellent companies and leaders in their respective spaces.
We are sticking with these positions, and I am confident we will be able to get back to breakeven or profitability. I’ll also be on the lookout for more opportunities to capitalize on the volatility in this high-growth sector with other names.