I figured it would only be a matter of time for oil to trend upwards from its strong correction that took place from mid July 2008 to mid January 2009. Keep in mind many OPEC nations were not exactly content with having millions of fuel abusers get such a break at the pumps over the last few months. Also, is it possible that such goals to create jobs via alternative energy sources in America were put on hold, or better yet, lost emphasis because oil was so low?
With oil low, dozens of nations whose export markets rely solely on oil become distressed. To fix this issue, OPEC decides to cut production. Back in December of 2008, OPEC cut production slightly over 2 million barrels per day. Another production cut of near 1 million barrels per day in the near future is the speculation and those repercussions of such supply cuts can take time opposed to trading speculation that can dictate the price of oil per barrel by the immediate second. However, once the production cuts start to assimilate, oil can trend higher. Now there is a bigger picture to this issue.
With oil potentially undervalued, two things can happen of many: 1) a correction can potentially benefit dozens of countries thus shifting their Gini Coefficient closer to 0 (assuming that an oil producing nation as a whole benefits from oil revenues and not just the cream of the crop/dictating political organizations) and 2) it encourages the United States to focus more on producing alternative energy in America thus creating jobs in such relevant sectors.
In one of my research reports I wrote at DePaul University a few months ago, I outlined several bullish strategies on how to capitalize on the assumption that the securities markets were fairly ignoring the correction in oil prices simply because the financial sector pushed the oil sector out of the lime light. If the correction in oil prices helped such companies like JetBlue and FedEx, such upside would be realized in the underlying stock and the put options to protect against any downside would expire worthless. Albeit the underlying stock of JetBlue and FedEx ‘inefficiently’ trending downward with the rest of the market, a January 2010 put option on JetBlue and FedEx with strike prices of $5.00 @ 1.75 and $60.00 @ 10.90, would have experienced a 54% and 132% return, respectively. With such substantial upside present in the positions as of March 10, 2009 (the increased value in the put options would exceed the loss from the underlying equities), it would make most sense to sell the put options prior to their expiration date.
With that said, similar strategies can now be applied to such solar stocks. If oil prices are trending upwards, perhaps it would make sense to start buying numerous solar stocks, or the call options depending on how bullish you are. If the Obama Administration wants to emphasize alternative energy, why would this not make sense? I understand that the ‘infrastructure spending’ part of the Stimulus Package did not help companies like Caterpillar outperform because such an allocation to a hefty project does not happen over one night. This is why it makes sense to buy put options on such related stocks to perhaps compensate for the downside because the markets are so volatile and again, repercussions can take time (known as a Protective Put strategy if one is going long Stock A and buying the put options to Stock A). Bottom line is that I am still optimistic and based on several sectors out there, including solar, I believe the moment to start getting the toes wet might just be now.
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2 comments:
H.W. Daniel,
Just to clarify, are you suggesting going long solar stocks while hedging your position with protective puts? I definitely understand the value of the protective put strategy; however, I would take care not to directly compare the conditions under which you tested your strategy with FedEx and JetBlue. Correct me if I’m wrong, but the prices of both those companies, at the time, were still priced within a fair range, compared to the current mass-undervaluation that is the market currently. What I’m driving at is, short of oil going below $30/barrel, is there really enough realistic downside left in the solar stocks to make buying protective puts prudent? At pre-market-correction-down some 50+% valuations I would absolutely agree, but I’m simply asking do you think there is enough downside risk left to warrant the purchase cost of the potentially worthless ‘protective’ puts? I’m obviously an optimist, I’m sticking with my bottom call that I made Wednesday about Tuesday’s lows (http://enlightenedeconomist.blogspot.com/2009/03/3609-646995-bottom-in-dow.html), so please provide some additional perspective into why an insurance policy on a solar long call would serve prudent at current market valuations.
Steven Louis, you make an interesting point and yes, there was a lot of room for the ball to drop in the examples I provided thus making sense for utilizing puts to protect against such downside. And I do agree that it might be too late to utilize puts to protect against such downside if the bearish sentiment already knocked many stocks, with an emphasis on solar, down. Yet in practice, stocks have been knocked down to levels below $1.00!
On the contrary, consider First Solar trading above $100 and down 'only' 35% ytd. This solar stock has yet to fall as far as the others. I know this is only one solar stock trading rather high on a per dollar basis, however, even if purchasing a put option (a contract involving 100 shares), the dollar ratio of 1 put contract to 100 shares of the underlying equity comes to be about 25-28&, in terms of where I see it. This was based on March 17th's closing price of Suntech Power Holdings and First Solar and the January 2010 puts just 'out-of-the-money.'
With this ratio, if the puts expire worthless, an investor would have a strong enough position to offset that loss incurred from the put.
Of course all investors should do their due diligence and own computations to see what is most suitable for them. But in the end, I am still bullish on solar. In a report released yesterday, photovoltaic solar grew 110% thanks to countries overseas... The World Bank is helping solar energy grow significantly in Sri Lanka via the Renewable Energy for Rural Economic Development project... If President Obama begins to create green jobs and provide incentives to such solar companies, the markets will show what companies will prosper.
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