Sun Edison (SUNE), SolarCity (SCTY), and Solar

Today I decided to take the plunge and long Sun Edison (SUNE) through selling cash-secured put options. A lot of my bullishness of the stock comes from knowing that David Einhorn owns it as well as a recent write-up by John Hempton of Bronte Capital about it,

SUNE reported earnings after the close last night and they missed EPS expectations by about 21 cents. The stock is down today about 18%. Since I don’t have a position in SUNE yet, I believe now would be a prudent entry point.

I’ve decided to sell put options instead of buying the stock because of the incredible implied volatility on the 156 day options. The IV is between 100-115%! Also, because of the sharp decline in the stock, the 50% delta option is not the same as the option with the strike closest to the current price of the underlying. Thus, I’ve split my risk by selling both the 50% delta option with a strike price of $7, and the 50% price option at $5. If both expire ITM and I’m put the stock, I my effective buy price would be in the low $4, a heft 20% or so discount to the current trading price. I believe this is a perfect example of how using options could yield a better outcome than trading the stock.

I also sold put options in another solar company: SolarCity(SCTY). I consider this a lower risk investment compared to SUNE as SCTY has a vertically integrated business model, allowing the company to control its cost structure as well as benefit from economies of scale. It also has the largest residential market share and a sizable commercial market share. SCTY. SCTY has the potential of earning a moat through achieving a cost advantage over its competitors due to its size and scale. Since SCTY had a lower IV and has also fallen by a lesser degree compared to SUNE, I sized the position to be smaller than the SUNE position.

Some thoughts on Solar: I made money in 2H2011 by being short solar. That was perfect timing as the solar industry literally imploded, Solyndra filed for bankruptcy, and many Chinese solar firms have since been bankrupted. What bothers me is that I missed the lows of First Solar in May 2012, which was also literally the bottom of the down cycle in solar stocks. This allows me to hopefully not repeat my same mistake.

I totally get the thesis that solar is a very long way from becoming a mainstream electricity source. This is due to our very primitive standard of battery technology, which is still at Generation 1.0 whereas we are in Generation 5.0 for jetfighters. This means that we are unable to cost effectively store the electricity generated through solar. However, I am also very aware that solar is becoming cost-effective with traditional power generation even without subsidies in many areas of the world, not just California. This is where I think the opportunity lies, not that Solar becomes a main power source for cities, but that it becomes an important contributor to the power grid and also where it becomes a standard investment in homes, just as say a garage or WIFI is.


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