Baerrus Magnus
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Baerrus Magnus in Options Trader; hang out at http://optionsforum.net,

Playing Solar Games With Canadian Solar (CSIQ)

CSIQ is a solar panel manufacturer that reports its Q2 2015 earnings tomorrow Aug 18 AMC. In an earlier post I mentioned in passing some important facts about CSIQ. The upcoming earnings prompted me to take a look on whether there is a possible trade here. First, note that CSIQ earnings, or rather stock's reaction to earnings, is unpredictable. On the chart below I graphed percentage gaps in the last 4 ER. Noting that stock has gapped up on seemingly poor results but at other times dropped on what appeared as a blowout quarter. Therefore I will stop with the fundamental analysis and will leave figuring out the sentiment to the reader. Instead I will simply analyze attractiveness of a few possible ways to trade this event.

Before we dive in I just wanted to mention that I traded three other stocks in this earnings cycle. Among them, CREE was a small lossafter a pretty bumpy ride. A bullish butterfly spread in RAX was a complete loss. Finally, trading a bull spread in KORS was a tough call that paid off. As the earnings season is winding down CSIQ is likely the last earnings trade for me until the next quarter rolls in.

Now let's take a close look at a few possible ways to trade CSIQ. I am mildly bullish but lack any conviction whatsoever. There my proposals will be mostly just trades targeting a certain range. With 1 day to go before the earnings CSIQ has closed @ $24.23

Trade #1: Call butterfly 22 / 24 /26 with 26 Call kicker. This trade will do well if the stock does not budge or runs up beyond $26. The total package price depending on the price of the butterfly is somewhere around $1.15. The position is opened for a cash debit and no margin is required. This is a conservative, plain vanilla way to trade.

Trade #2: September Short strangle 28C / 21P for a credit of $1.55. Why not August? - I want to sell more IV, which is running at 75% and I hope for more opportunities to manage this position should either strike get breached. With vega of $0.05 I am expecting to collect over $1 once the implied volatility has crushed down to 50%. This position should do well as long CSIQ does not make a large move either way. Note that CSIQ have made big moves before. But let put down some numbers. Assuming $24 as a center, this strangle will have a downside break even point 12.5% away and upside BE 16.6% away. Look at the chart again. The past single day moves were 24%, -16.7%, 14.6% and 9.37%. Is that too close for comfort? - You decide. Interestingly the last couple of quarters earnings induced moves were reversed within days. The important thing to keep in mind is this is a naked short options trade requiring lots of margin. A 10 contracts strangle will require $5800 of margin. Please do not spend your last $6K as in case of a blowout move beyond the breakeven points your margin requirement will grow proportionally.

Trade #3: To put things into perspective here is a CSIQ earnings trade suggested by a reputable options trading service, McMillan analysis. While I lean toward selling premium, McMillan recommends buying a straddle. That is betting on an incredibly big move necessary to overcome the implied volatility getting crushed: Position E1059: Canadian Solar (CSIQ)
Buy 6 Aug (21st) at-the-money straddles if the cost do not exceed 12.9% of the strike price. Note: $24 straddle is currently going for $4.35 which is 18.1%. Hence the trade is not advised.