Make sure you follow the whole article as I outline a credit spread with a potential 44% return.

First, let’s talk about jobless claims and the number that I will look for to signal trouble in the water. There are a lot of discussions about whether or not we are in a recession based on two consecutive quarters of negative GDP growth, but this time is certainly very different from other recessions. If you look back to late 2008 and early 2009, the unemployment rate went up to 9.9%. We are currently at 3.6% and you can see from the chart below that we’re still on an incredibly low unemployment rate. That is why I didn’t overreact to the news earlier this week that there are fewer jobs available or that the number of unemployment claims went up this week.

Jobless claims came in more than expected, rising up to a seasonally adjusted 260k, bringing the 4-week average up to 254.75k.

Jobless numbers come out every week, but to me, this will serve as a warning if they get up to 300k a week.

From the chart below we can certainly see that jobless claims are on the rise going back to mid-May, but we still aren’t seeing spikes as we did in 2008. Some of these numbers can be explained by the continuing chip shortage that is still affecting the automotive industry and causing longer plant shutdowns in July, the usual time when factories close for a week for retooling.

To close out the week I have a trade idea for you with a potential 44% return in the next 43 days.

Today’s trade idea comes from First Solar (FSLR), which just had earnings a few days ago.
Let’s take a look at the chart first.

After earnings, the stock jumped about 16%. When stocks jump 16-20% after earnings, there is a historical probability of the stock staying within a trading range and not filling the gap. If you look back to the left of the chart, you can see a point of resistance in the $105 range.

Here’s where the stock is trading over the last couple of days.

You can see the stock gapped and then stalled as the highs for the last 5 days stayed around the same level around $100.

Going out to the 16 SEPT expiration, we can set up a credit spread, selling the $105 call (above resistance) and buying the $110 call. This is a trade that assumes FSLR won’t trade above $105 by 16 SEPT. The sold strike is over 5% from the current price and gives us some room even if the stock does edge up a little more.

Sell to open $105 SEPT 16 CALL
Buy to open $110 SEPT 16 CALL
Credit received: $154 per spread
Buying Power Required: $347 per spread
Max Profit = 154 / 347 = 44% ROI
I like exits at 50% of the credit received.
Exit: If the stock closes above $105, get out.

At the time of writing, that gives you a max loss of $68. If you exit at a 50% potential profit of $77 and a potential loss of $68 if you sell at the short strike, you have a better than 1:1 reward to risk ratio.

Have a great weekend, everyone!