[Options] Plugged in, Ready to Play!
Here's what Steve Strazza had to say about Plug Power $PLUG:
...we have Plug Power Inc $PLUG, a $19B company that provides hydrogen fuel cell solutions for the electric mobility industry in the US and Europe:
Last year, PLUG exploded higher from a massive 6-year base and rallied from about 10 to 75 in just a matter of months! The stock reached resistance at the 685.4% extension and started to digest its recent gains and correct from there.
In May 2021 price began to catch a bid again as it rebounded off a very logical level at our initial objective from last year’s base breakout. Now that price appears to have found its footing, we see little reason why PLUG shouldn’t carry on higher in the direction of its underlying trend.
Also, notice how clean the base breakout and retest is on a relative basis in the lower pane. As long as PLUG is above those 2014 highs against the overall market, it should maintain a leadership position and we’d anticipate more outperformance from the stock in the foreseeable future.
We want to own PLUG but only if we are above 29 with a primary target of 50 and a secondary objective at the 2021 highs around 76.
What's interesting about this stock is that although implied volatility readings aren't so alarming, we're seeing significantly more premium in upside calls versus downside puts. So we're going to put these premiums to our advantage so that we can participate on the upside with dramatically lower risk per unit.
Here's the Play:
I'm buying a $PLUG 45/50 September/December Diagonal Call Spread for approximately 95cents debit.
What this means is I'll be short the September 45 calls and long an equal amount of December 50 calls. Due to the differing strikes and the short call strike being lower than the long call strike, this position will require margin.
What I love about this position structure is, as long as $PLUG even just drifts slowly higher, we'll likely have a winner on our hands. As you can see in the diagram above, we've got a wide profit zone from now until September. As long as $PLUG lands somewhere between $33 and $54 per share at September expiration (when the short options expire), then we're making money.
That said, here's my risk management plan:
If $PLUG trades up to $45 at any time before September expiration, I'll close the entire trade down and book my profit -- whatever it is (the closer in time we are to expiration, the larger the profit). As you can see from the chart above, once we get above $45, then our potential profit begins to decrease. I don't want to be on that side of the mountain.
If $PLUG cannot hold above $28 per share, then I'll look to close the entire spread down for whatever I can salvage. My risk is capped at the 95 cents I paid at initiation, so there's no panic at the exit here.
If neither price targets are hit before September expiration, then I'll let the short Sept calls expire away worthless and then I'll get to ride the Long December 50 calls for a few more months and enjoy the possibility of some potentially unlimited gains if $PLUG makes a run at the aggressive upside target north of $75 per share!
If you have any questions on this trade, please send them here.
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