Trade Alert: Powering AI Data Centers
Revisiting a promising small cap industrial.
Two Christmas Eve Programming Notes
U.S. stock and options markets are closing at 1pm today, so if you want to place this trade today, be sure to enter it before then.
Since markets will be closed for Christmas tomorrow, I plan on posting this week’s top names tonight.
Now on to today’s trade alert.
Powering AI Data Centers
Back on Halloween, we entered an options trade on a small cap industrial that makes generators that power the data centers behind the AI boom.
That company reported earnings in November, and beat on both top and bottom lines, but the guidance and messaging was disappointing. Management’s commentary was muddled enough that the stock got punished. Then came November’s brutal momentum correction, and the stock fell further.
Or trade was a four-leg options combo consisting of a put spread expiring shortly after the company’s earnings, and a call spread expiring early next year. Despite the stock’s swoon, we managed to exit the put spread with a tiny profit, and still have the call spread open as lotto ticket.
Avoiding Falling Knives
Often when an attractive stock falls, we’re tempted to double down, but the recent momentum correction punished investors who did that. As a result, I added a couple of rules to avoid falling knives last month.
Before entering another trade in a beaten-down stock, I want to see two things:
The stock’s Chartmill set-up rating (a measure of share price consolidation) hit 5 or higher on a scale from 0 to 10.
The stock’s Relative Strength Index be over 30 and rising, or stable over 40.
As of last night, our power systems company passed both of those tests. In addition it showed up on my “7777” Chartmill screen, which looks for stocks with profitability, health, growth, and valuation ratings of 7 or higher. On Tuesday night, only 12 optionable stocks trading in the U.S. met those criteria. One of them was the silver miner we placed a trade on a couple of weeks ago,
And one was our power systems company. It looks cheap now, with a Chartmill valuation rating of 9, and it looks like it has already bottomed out technically. Today’s trade structure includes a bullish tail going out far enough to capture two earnings reports—if the company beats and raises guidance during one of those two reports, the stock could gap up.
Details below.
Today’s Chartmill Trade
(Embodied AI / data-center power capacity)
The stock is Power Solutions International (PSIX 0.00%↑), and our trade is a combo consisting of these four legs:
Buying the $85 strike call expiring on August 21st, 2026,
Selling the $85 strike call expiring on May 15th, 2026,
Selling the $60 strike put expiring on May 15th, 2026, and
Buying the $55 strike put expiring on May 15th, 2026,
For a max net debit of $2.35. The max gain on 1 contract is $1,322.95 (and the max gain will be uncapped after the May expiration if the short call expires out of the money), the max loss is $735, and the break-even is with PSIX at $62.35. This trade filled at $2.35.
Exiting This Trade
My plan:
Calls / calendar (legs 1 & 2): Open a GTC limit order to buy back the May $85 call at $0.20, and raise that price if necessary as we approach the May expiration. If the May $85 call are in the money as we approach expiration, I’ll sell the August $85 call and use part of the proceeds to buy to close the May call. If the May call expires out of the money, I’ll post a GTC limit sell price for the August call in the comments here and via chat/email shortly after.
Put spread (legs 3 & 4): Open a GTC limit order to exit at a net credit of $0.20, and raise that price, if necessary, as we approach the May expiration.