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Option Idea of the Week: Canadian Solar Inc. (CSIQ)

After an impressive rally, CSIQ shares could be poised for more upside

by 2/7/2014 12:06:56 PM
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Canadian Solar Inc. (NASDAQ:CSIQ) has been on quite an impressive tear of late. One year ago, shares of the solar equipment manufacturer were firmly planted in single-digit territory (the stock closed at $4.80 on Feb. 7, 2013). One year and a massive uptrend later, the stock has zoomed up to $38.24. Even after this rally, however, there may be additional upside potential. There remains a sense of apathy (or even skepticism) toward CSIQ that represents future buying power waiting on the sidelines.

Let's first look at Wall Street. Only two firms currently follow the shares, meaning it is effectively off analysts' radar. Positive initiations could be a self-fulfilling prophecy and lead to more attention (and potentially additional buying demand).

Options players have also started to become more skeptical. The stock's International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) 10-day put/call volume ratio has jumped to 0.60 from 0.44 last Friday, suggesting increased demand for long puts (over calls). In fact, this ratio is higher than all but 8% of similar readings taken during the last year.

Elsewhere, the number of shorted CSIQ shares rose by nearly 54% during the last reporting period. This trend merely highlights the stock's perseverance in the wake of heavy selling pressure (year-to-date, CSIQ has risen almost 29%). More than 5% of the equity's available float is now sold short, so a modest short squeeze could be in the cards.

On the charts, Canadian Solar shares recently pulled back to support at their 40-day moving average and bounced higher. Data from Schaeffer's Senior Quantitative Analyst Rocky White reveals that on similar pullbacks to this trendline, CSIQ shares have gained an average of 17% in the 21 days following this signal.

Daily Chart of CSIQ since July 2013 With 40-Day Moving Average

Finally, it's worth noting that CSIQ currently has a Schaeffer's Volatility Scorecard reading of 100 -- the highest possible. This indicator suggests that the stock has tended to make outsized moves, relative to what the options market has priced in. Investors interested in targeting Canadian Solar Inc. (NASDAQ:CSIQ) for longer-term upside might consider the in-the-money July 33 call, which currently sports an ask price of $10.30.

Today, the stock is moving higher on news that it sold an Ontario-based power plant to a BlackRock, Inc. (NYSE:BLK) fund. The 10-megawatt plant will begin producing electricity by the third quarter.

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