Power Up with Plug

03/04/2014 8:00 am EST


Andrew Giovinazzi of OptionPit.com offers an option trade idea on a fuel cell company that has been showing bullish momentum.

The market made fresh all-time highs as the economic data was not too bad, and most of the early bad data relegated to the nasty weather department. The new Fed Chairman was nonplused by the data and saw no real reason to discontinue current Fed policies, which means they are continuing to exit, helping the economy with monetary stimulus. For whatever reason, that gave the market a reason to rally as opposed to last spring when we sold off. The paces of the rallies are slowing a bit from last year’s 1-2% jumps.

A stock I follow is Plug Power (PLUG). The pace of the rally in this name is starting to subside as well, except the jumps in here are on an order of magnitude higher. Note the realized volatility landscape here as PLUG was one of the few stocks up on the week (30%), but the realized volatility actually dropped recently. This means the stock is slowing down but still climbing.

Charts by OptionVision
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The PLUG story is fuel cells that they now sell to Walmart (WMT) and Fedex (FDX). Now that the company has technology they can sell the upside, potential can be pretty big. If the company can start breaking even, which is possible, they will be ahead of the green curve. The fact that WMT will write an eight-figure check is worth noting. I think the continued rise, albeit slower, means the bull case is sticking.

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The Trade
With this type of name, selling OTM puts to finance a long call is a decent trade two-four months out, or a ratio call spread (by 2 and sell 1) of similar duration. There is a fair amount of speculation here, but I think the blue-chip customers will be getting others jumping on the green train. There most likely will be pullbacks, so space out the put sales with buying calls on pull backs only.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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