This market is seriously having an identity crisis. But there is a way to use that to your advantage.
The ongoing uncertainty of a market desperately looking for some footing is creating volatility. These wild swings can set up some nice controlled risk, high potential return trades. One that popped up for us recently is a clean energy trade we have been watching for a while.
It has looked like clean energy has been excessively beat down for some time. Think about it.
- Traditional fuel prices are skyrocketing
- Costs to implement clean energy have been declining as we see economies of scale taking effect
- Solar offers an off grid energy alternative as infrastructure shows more signs of not keeping up with demand
Yet when you look at clean energy stocks and trades, they don’t seem to be getting the benefit you would expect. Take a look at TAN, an ETF we have analyzed in the past:
Since last Nov it has dropped from a high and hasn’t been able to really get back above the 200 day moving average. But just yesterday it jumped and is making another run at the 200. If it can break above and find support it has the potential to run hard at the previous high somewhere around the 100 mark.
That is possible, but when you start to objectively look at the risk/reward on that trade it isn’t all that appealing. Another way to leverage this move would be to look at a long term option. The Oct 21 Calls for TAN would offer more time for a move to play out and it would also take advantage of the momentum by moving premiums up just on the expectation TAN might shoot back to the high. The Oct 100 calls are at .50 this morning. That is a pretty low premium for an option with that much time to move built in.
Buying the stock and waiting for it to possibly turn a 25% profit isn’t bad, especially in this current climate, but grabbing a .50 call and seeing it potentially double is much more appealing.
Andy Chambers really lays out a great approach for spotting long term options that have great potential and also walks through through the tools you need to confirm it has the best chance of becoming a winner. Check out his Market Propulsion approach here and we will keep an eye on how this example plays out.
Keep learning and trade wisely,
Market Wealth Daily