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Options Edge: CSX Corp., JetBlue Airways, Canadian Solar, and Valero Energy

The railroad surprised the Street with a stronger-than-expected quarterly profit

by Elizabeth Harrow (eharrow@sir-inc.com) 10/14/2009 9:29 AM

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Today's column includes the latest quarter results from CSX Corporation (CSX), a bearish note for JetBlue Airways Corporation (JBLU), a rosy forecast from Canadian Solar Inc. (CSIQ), and a dramatic downgrade for Valero Energy Corporation (VLO). Each day, Options Edge focuses on the hot stocks in the news and gives you a unique insight into each stock's sentiment backdrop. Our time-tested contrarian approach centers on options, and gives you the trading tools to approach the day with a much-needed edge over the investing herd.

CSX Corporation

CSX Corporation (CSX: sentiment, chart, options) stepped into the earnings spotlight last night, with the railroad reporting a third-quarter profit of $293 million, or 74 cents per share. Revenue for the period fell 23% to $2.3 billion. The bottom-line results exceeded analysts' expectations for a profit of 71 cents per share, while the top-line number was roughly in line with consensus estimates for revenue of $2.32 billion.

CSX price chart Volumes continued to decline during the quarter, but the pace of the decline was notably slower than that seen in the second quarter. "The third quarter reinforces our view that the worst of the recession is likely behind us," asserted Michael J. Ward, the company's chairman, president and chief executive officer.

CSX is about 3% higher in pre-market trading, adding to its year-to-date advance of 36.4%. The equity recently reestablished a foothold above support at its 10-week moving average. This trendline, along with its 20-week counterpart, has guided CSX higher since April.

Ahead of last night's earnings report, some traders rushed to add last-minute bullish bets on CSX. The stock's October 45 call traded volume of 5,271 contracts, with 67% of these calls crossing the tape at the ask price. Open interest here rose overnight from 4,560 contracts to 6,267, confirming that new calls were added on Tuesday.

JetBlue Airways Corporation

JetBlue Airways Corporation (JBLU: sentiment, chart, options) was smacked with a downgrade this morning, as Barclays lowered its rating from "overweight" to "equal weight." The bearish note came amid upgrades for sector peers such as AMR (AMR) and Continental (CAL). Barclays cited JBLU's "relative appeal" (or apparent lack thereof) within the broader airlines group for the downgrade.

Despite the skeptical commentary, JBLU is fractionally higher ahead of the bell. The shares are currently preparing to mount an attack on resistance at the $6 level, which has held the airline issue in check for the bulk of 2009.

During the short term, a glut of out-of-the-money call open interest could exacerbate resistance in the area. JBLU's October 6 call is home to 11,086 open contracts, while the October 7 call has a noteworthy 12,335 calls outstanding. With expiration approaching this Friday, these overhead calls could exert options-related pressure during the next several sessions.

Canadian Solar Inc.

Late Wednesday, Canadian Solar Inc. (CSIQ: sentiment, chart, options) announced that it expects third-quarter revenue to exceed Wall Street's expectations. The alternative energy issue expects quarterly revenue of $210 million to $215 million, with shipments ranging between 101 megawatt (MW) and 103 MW. Meanwhile, analysts are forecasting third-quarter revenue of just $202.7 million. CSIQ cited higher anticipated shipments through the end of the year for the upwardly revised guidance.

CSIQ has ticked modestly lower in pre-market trading, with the equity hesitating near familiar resistance in the $18 neighborhood. This region has acted as a technical roadblock since mid-September.

As the shares struggle beneath this troublesome chart area, option players are adopting a pessimistic stance toward CSIQ. The stock's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.83, which ranks higher than 85% of other such readings taken during the past year. In other words, short-term speculators have been more skeptically aligned only 15% of the time.

Valero Energy Corporation

Valero Energy Corporation (VLO: sentiment, chart, options) received a drastic downgrade this morning, as Soleil Securities chopped its rating from "buy" to "sell." Analyst Jacques Rousseau predicted that VLO could confess to a significant asset write-down in its third-quarter earnings report, which is due out on Oct. 27. The analyst also dropped his price target on the equity from $25 to $17, representing a discount to Tuesday's close at $19.18.

From a technical perspective, VLO is about 0.7% lower in pre-market action. The stock is down 11.4% year-to-date, and it continues to be stifled by long-time resistance from its 10-month moving average. This trendline hasn't been bested on a monthly closing basis since December 2007.

It's no wonder, then, that speculators prefer puts over calls on VLO. The stock's 10-day International Securities Exchange (ISE) put/call volume ratio stands at 0.81, hovering just four percentage points from an annual bearish peak.

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