I hate to rain on the earnings parade that officially kicked off this week with Alcoa, Inc. (NYSE:AA) taking its typical lead, but two solar stocks — First Solar, Inc. (NASDAQ:FSLR) and Canadian Solar Inc. (NASDAQ:CSIQ) — look enticingly hot from a trading standpoint with earnings still a few weeks out.
Compelling chart setups and equally interesting option ideas in FSLR and CSIQ stock aren’t likely to receive headline attention, with investors’ eyes turned towards the next couple weeks of corporate confessionals. So if that’s your thing, be warned.
But if you want the opportunity to make money, come rain or shine, FSLR and CSIQ are worth your attention right now.
FSLR Weekly Chart
The weekly chart of First Solar shows a stock at crossroads, so to speak. Bullish investors will likely be intrigued by FSLR’s sizable and relative strength gains of about 50% compared to a slight gain for the broader market.
Next, shares of FSLR are also consolidating very tightly between the 50% and 62% Fibonacci retracement levels from the 2014 high to 2015 low struck in late January. Bulls can likely take refuge, or interest at least, in the technical contraction developing in the upper part of its corrective base.
Alternatively, the same Fibonacci levels in FSLR, resistance from a prior longstanding trend line dating back to 2012 and potential lower high relative to 2014’s top could prove insurmountable. Aided by an anticipated expansion in price volatility out of the current ultra-tight range, there is evidence bears could rain on the bulls technical parade.
CSIQ Trading Chart
Regarding FSLR’s solar stock compared to Canadian Solar, shares of CSIQ have forged similar gains and are also sandwiched between the same critical Fibonacci levels. The visual pattern is slightly different in CSIQ, however.
Depending on which technician you call upon, CSIQ stock could be stated as being bearishly positioned against a weekly downtrend line, as well as the forementioned 50% and 62% retracement levels. More optimistically, one bear’s downtrend is another bullish investor’s W-base. This appears to hold true in Canadian Solar shares right now.
Time will tell, of course, whether bulls or bears will be the eventual victor.
FSLR and CSIQ Option Premiums
The FSLR and CSIQ implied/statistical or underlying volatility charts are very similar. For reference and without getting redundant, below is First Solar’s weekly chart as a proxy. The absolute levels for FSLR and CSIQ are different, but both names are just removed from historically cheap volatility readings.
Behind the pressure in volatility readings for both FSLR and CSIQ are relative stock performance; the current and atypical, narrow trading ranges; broader market volatility readings near multi-year lows; and earnings still a handful of weeks out for both First Solar and Canadian Solar.
Due to this confluence of factors, long premium strategies such as a bullish directional play using a long call in FSLR or CSIQ or likewise, a bearish play using a long put, might be entertained.
CSIQ Long Call
Canadian Solar is expected to report earnings around the time that May options expire –that makes the May premium is a bit of a gamble as far as an earnings catalyst. I’d consider waiting another for the June contract, which as a monthly will offer decent liquidity relative to the weeklys.
However, for those seeing the sun continue to shine on CSIQ and willing to wager bullishly on May, the at-the-money May $35 call was priced at last check for $2.15, with CSIQ shares near $34.
An expiration breakeven price of $37.15 would require the CSIQ contract to trade above its current contraction highs by roughly 3% — and an earnings catalyst could very well do that.
Canadian Solar has a history of volatile movement following its report. In fact, average moves of about 16% the past year and range of 10.6% to 24.2% are sufficient to cover a required 10% move to double the call premium to $4.30.
FSLR Long Straddle
A different kind of options play and this one in FSLR stock is a long strangle. Given the reasonable call and put premiums, an ambiguous chart and very tight technical contraction poised to make either bears or bulls capitulate, the FSLR May $57.5 put/$65 call strangle is priced for $3.80 mid-market.
Expiration breakevens for this non-directional strategy are $53.70 and $68.80 and about 12% removed from FSLR’s stock price of $61.18. Earnings for FSLR stock are estimated to be between May 5 and May 8.
The good news is earnings in that time range would give the FSLR strangle an additional week to gain value. The bad news, if recent history is any indicator, is the average gain or loss seven days following the report is around 10.5% for First Solar stock.
First Solar’s post-earnings average move falls slightly shy of the 12% required by the strangle. But given First Solar’s earnings are still about a month out and technically shares of FSLR look primed for their own surprise volatility announcement, that could prove “rain or shine” for investors — and further consideration of this strangle appears to be in order.
As of this writing, investment accounts under Christopher Tyler’s management currently own CSIQ shares and CSIQ options in a hedged bullish position. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.
