Option Trading Strategy for Yingli Green Energy (NYSE:YGE) on Recent Gains
Jan 06, 2009
Author: SCP Editor
January 6, 2009 – We wrote on December 30, that our near-term price target for Yingli Green Energy (NYSE:YGE) was in a range of $8 to $9 (then trading at $5.34) and as of yesterday, it closed at $7.25, up $1.91 or 35% since we wrote than commentary. This morning the stock should get more of a lift on a stronger market and is approaching our target range.
We continue to think the long-term fundamentals for YGE remain strong, and are sticking to our forecasts (see “Yingli Green Energy – Our Take”). Our outlook for the solar sector, which we think was way oversold in 2008 on concerns about module oversupply, declining poly prices and tight credit markets, is that a rally in January is likely, and we have been seeing that so far.
But our outlook for the broader markets is for a sell-off after the initial buzz of optimism of the incoming Obama administration subsides later this month which could bring the markets back to test November lows. Against this backdrop, solar stocks will have a hard time holding their ground, so we think that these stocks will likely retrace some of their January gains. YGE, in our opinion, is no exception. Our recommendation, then, as a short-term trading strategy is to sell out-of-the money covered calls on YGE into strength (e.g., March 10s or June 12.50s) which would reduce cost average by $0.70 to $0.90 (assuming today’s price) or at least 13%. If the stock gets called away, the trade at $5.34 locks in a 115% gain (assuming March 10 call price) in just three months. If it doesn’t and we continue to see the markets churn sideways, then the call expires, the trade’s purchase price is lessened, and calls can be written again.
Over the long term, we think Yingli’s stock moves well back into double digits but this will be a process as the broader markets still have much to work out and there is still significant perceived risk being built into valuations, including the solar sector. The option strategy we are discussing this morning is one way to take advantage of the near-to-mid term choppiness.
Important Disclosure: The SCPEditor has no position in YGE.. The information provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.
