The bulls are out in force for solar firm Canadian Solar Inc. (CSIQ) ahead of tomorrow’s third-quarter earnings report.
Expectations are for steep year-over-year declines in both revenue and earnings, but CSIQ stock has given bulls something to cheer about after rallying 50% off its late-September lows. CSIQ stock is now nearing overbought levels, but there are still opportunities to be found for options bulls ahead of the event.
Diving into the numbers, Wall Street is expecting third-quarter earnings to plunge from $1.75 per share last year to just 28 cents per share this year. Furthermore, revenue is expected to drop 20% to $733.9 million. However, analysts remain optimistic that results won’t fall quite that far, with EarningsWhisper.com reporting a third-quarter whisper number of 31 cents per share.
This bullish sentiment is pervasive throughout the rest of the brokerage bunch when it comes to CSIQ stock. Specifically, data from Thomson/First Call reveals that all nine analysts following Canadian Solar rate CSIQ a “buy” or better. What’s more, the 12-month consensus price-target for CSIQ stock rests at $34.55, representing a 47% premium to current prices.
Even options traders are getting in on the bullish act. Currently, the November put/call open interest ratio for CSIQ comes in at a very bullish reading of 0.27, with calls nearly quintupling puts among options set to expire within the next month. This ratio plunges even lower when looking at just the weekly November 13 series, bottoming out at 0.11.
Short sellers may be responsible for some of this bullish options activity. As of the most recent reporting period, some 6.4 million CSIQ shares were sold short, accounting for a sizable 15.2% of the stock’s total float. While call hedging could take some of the edge off of a potential short-covering rally, a strong earnings report could still create a short-squeeze situation for CSIQ.
Click to Enlarge Overall, weekly November 13 series options are pricing in a potential post-earnings move of about 11.4% for CSIQ stock. This places the upper bound at $26.17, while the lower bound lies at $20.83.
Support should materialize near the round-number $20 region, while resistance remains thick in the $27 region, which is home to CSIQ’s 200-day moving average.
2 Trades for CSIQ Stock
Call Spread: While excessive optimism can be a contrarian warning sign, CSIQ has put on quite a technical showing during the past month. There is still the risk that a poor report could prompt CSIQ bulls to rush for the exits, so traders should use caution ahead of tomorrow’s event. That said, those traders looking to side with the bulls ahead of Canadian Solar’s earnings might want to consider a November $24/$26 bull call spread.
At last check, this spread was asked at 85 cents, or $85 per pair of contracts. Breakeven lies at $24.85, while a maximum profit of $1.15, or $115 per pair of contracts, is possible if CSIQ stock trades at or above $26 when these options expire at the end of next week.
Put Sell: If the excessive bullishness levied against CSIQ worries you, or you just aren’t convinced that CSIQ is going to make much headway after tomorrow’s report, you might consider an out of the money weekly November 13 series put sell.
At last check, the November $19.50 put was bid at 20 cents, or $20 per contract. As with all put sell positions, you keep the initial premium received as long as CSIQ stock trades above $19.50 ahead of weekly November option expiration at the end of this week. However, if CSIQ trades at or below $19.50 ahead of expiration, you could be assigned 100 shares at $19.50 each for each put contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.