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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio

June 16, 2014 - Solar Energy Gains Steam

Of all the renewable energies, solar is the one that catches the most attention. Solar energy has been around for decades, but until recently high costs have prevented it from really gaining steam and posing a real threat to the traditional electricity industry.

The good news is that costs for solar panels, and for solar energy storage systems, have been falling, and will most likely continue their downward trend. The primary reason being that solar energy is a technology. The great thing about technology is that over time, it gets cheaper. That is just the nature of the beast, and solar energy is no exception.

At the same time, fossil fuel extraction is going to get more expensive. It will become increasingly more difficult over time to pull fossil fuels out of the ground, and this will continue to push fossil fuel prices higher.

With solar prices falling, and fossil fuel prices rising, there is no reason why solar power cannot continue to gain importance around the globe.

Even as recently as five or ten years ago analysts questioned whether or not solar power would ever gain enough momentum to pose a threat to the electric sector, but that view has started to shift, as solar power's importance and competitiveness continues to grow.

In May, Barclays took the bold step of  downgrading the entire electric sector of the U.S. high-grade bond market. Barclays said that falling prices for solar panels and energy storage systems are likely to disrupt the status quo in the next few years.

Barclays pointed out that in Hawaii, for example, the costs for residential solar power is already competitive with the traditional utility grid. And soon Hawaii will not be alone? California is expected to follow suit in 2017, and New York should get to that point by 2018.

I have written a couple of reports on solar over the last year, the most recent being in March. At that time I was bullish on the sector, and I remain so at the current time. In my previous article, I pointed out how solar represented 29% of all new energy capacity last year, which was up from just 10% during the same period last year, a trend which I expect to continue.

This ties back to lower costs. Last year, solar systems cost, on average $2.59 per watt, dramatically lower than the $9 it was as recently as 2009. With prices expected to continue falling, the future is looking bright for the solar industry.

In March, we took a look at the Guggenheim Solar (TAN) exchange-traded fund. TAN holds some of the biggest names in the industry, with First Solar (FSLR), SunEdison (SUNE) and SunPower (SPWR) among the fund's top ten holdings. When we last took a look at TAN, it was trading at $46.04, and I suggested a 31/35 bull put credit spread. Since that time, TAN has fallen to $41.57, but the trade still remains on track for a full return.

Chart courtest of

While TAN has fallen from its recent highs, it appears to have formed solid support, and is once again trending higher, and the opportunity still exists to pull in some more profits from the growing popularity of solar power.

A nice hedged trade on TAN at the moment would be the October 30/34 bull put credit spread. To set up this trade, you would sell the October 34 put while buying the same number of October 30 puts for a credit of 45 cents. This trade has a target return of 12.7%, which is 36.4% on an annualized basis (for comparison purposes only). With TAN currently trading at $41.57, this trade has built in 17.1% downside protection.

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