Options Update: Canadian Solar Inc. Call Traders Forecast Sunny Skies

              

Canadian Solar Inc. (CSIQ: sentiment, chart, options) has joined the rest of the solar sector in a broad rally today, as investors are shaking off a fourth-quarter loss at Solarfun Power (SOLF) in favor of reports out of China that the Chinese government is open to supporting the local development of solar energy. According to Asian technology newspaper DigiTimes, China hasn't yet designed a program or set a schedule for solar energy subsidies, and attributed the favorable comments, made at a Taiwan-China photovoltaic industry convention, to Chinese Department of Renewable Energy officials. While CSIQ is incorporated in Canada, the company conducts all of its manufacturing operations in China.

"This is consistent with what we have always heard and thought," Cowen & Co. analyst Robert Stone told Dow Jones Newswires. "The Chinese market could potentially be very large because China uses a lot of energy and demand grows with the economy," Stone added.

CSIQ has long been a bullish favorite in the options pits. The stock's Schaeffer's put/call open interest ratio (SOIR) currently rests at a reading of 0.29, indicating that calls nearly quadruple puts among near-term options. This ratio also ranks below 92% of all those taken in the past year, meaning that investors have been more bullish toward CSIQ only 8% of the time in the prior 52 weeks.

This bullish options configuration is supported by data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). Currently, the ISE/CBOE 50-day call/put volume ratio arrives at 20.87, meaning that 20 calls have been bought to open for every put purchased on these exchanges during the prior 2 weeks. Driving the point home, this ratio has been higher only 3% of the time in the past 12 months, underscoring the rising preference for purchased CSIQ call options.

The trend toward call options is holding firm in today's trading, with nearly 4,000 calls changing hands on CSIQ so far. This volume has outpaced the stock's average daily call volume by more than 10 to 1, placing the shares on our Intraday Volume Explosion List. The most active option is the out-of-the-money April 7.50 strike, as more than 3,300 of these contracts have traded at this front-month strike. Looking at the chart below, you can see that nearly all of this volume is changing hands at the ask price, suggesting that we are looking at the initiation of fresh buy-to-open call positions on CSIQ.

The Anatomy of a Canadian Solar Call Position

Digging into today's CSIQ call data, I noticed 2 blocks of April 7.50 calls totaling 1,000 contracts trading at the ask price of $0.20 at 10:10 a.m. Eastern time. Assuming the options were bought to open, the total outlay for this position would be $20,000 -- (0.20 * 100)*1,000 = $20,000. For this trade to reach breakeven, CSIQ would need to rally about 60% to $7.70 per share from yesterday's close of $4.83 per share by the time the options expire on April 17. The maximum loss on this position is limited to the initial investment of $20,000.

CSIQ was already in rally mode heading into today's trading, rebounding nicely from its early March lows. However, the stock faces some potentially stiff overhead technical resistance. Let's see if the stock's technical and sentiment backdrops point toward any additional gains for the shares.

Checking the Charts

From a technical perspective, CSIQ has outperformed the S&P 500 Index (SPX) by 21% on a relative-strength basis during the past 20 trading days. The equity has garnered short-term support at its 10-day and 20-day moving averages, placing the shares on course to close their first week above their 10-week and 20-week trendlines since June 2008. However, the stock has still plunged more than 77% during the past 52 weeks, and it could take more than a short-term rally to erase the stigma attached to this poor long-term technical performance. Furthermore, the security is now battling to reclaim the 6 level, site of former support and resistance for the shares. Most recently, this region capped the equity for nearly the duration of January.

The Sentiment Drivers

Outside of the rampant optimism among options traders, investors are heavily bearish toward CSIQ. Currently, all 7 analysts following the shares rate them a "hold" or worse, according to Zacks. Meanwhile, Thomson Reuters reports that the consensus 12-month price target for CSIQ rests at $3.56 per share - a discount of 68% to the equity's current trading range near $6 per share. Any upgrades or price-target increases from this negative bunch could provide additional buying pressure for the security.

Meanwhile, short sellers have also taken out a substantial bearish position on CSIQ. Despite a meager decline of 2.35% in the number of CSIQ shares sold short during the most recent reporting period, nearly 16% of the stock's float remains shorted. If the equity can make a clean break above the 6 level, it could send these bears scrambling for the exits, creating a potential short-squeeze situation.

The Verdict? Canadian Solar shares are already benefiting from short-term momentum that could pressure bearish investors in the short-selling community. The situation could be exacerbated further if rumors of the Chinese government's support for the solar sector are confirmed. Given this backdrop, it is not entirely out of the question for CSIQ to gain the additional 25% needed for an April 7.50 call to reach breakeven. While this trade feels a bit too aggressive for my tastes, there are few alternate strikes to bring the risk down. The only other reasonable option in the April series would be the in-the-money 5 call, which is probably where I would place my bets, just in case the stock struggles to overcome resistance in the 6 region for a few trading sessions.

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