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Strategic Mindset: The market is unstable and rapid changes could happen. We saw selling into the close today after a whipsaw week and Implied Volatility (IV) has been mostly rising during this correction. We've identified a Target that fits our strategic mindset.

Target: Coinstar (CSTR) Trading @ $66.99

Commit Criteria: Implied Volatility should rise as CSTR approaches its earnings announcement on April 26th. We will attempt to ride this increase in IV using a straddle on the May expiration options. CSTR IV should rise at least 10% before the announcement. A pre-announcement caused CSTR to gap up today. This could possibly lead to more price movement over the next week.

Tactic: OPENING 10 CSTR MAY 67.50/67.50 Straddle @ $7.35 Debit

Tactical employment:

  • Buying to Open 10 CSTR May 67.50 Calls
  • Buying to Open 10 CSTR May 67.50 Puts
  • As a Straddle
  • For a net debit of $7.35 (10 @ $735 for a total of $7350.00)
  • Maximum Gain: Unlimited
  • Maximum Loss: $7350.00max

Mid-Course Guidance: We will be watching closely for IV changes and major price movements in CSTR as we get closer to the earnings announcement on 4/26.

Profitability Target: We would like this trade to go up 30% to a position price of $9.56, where will will exit.

Exit tactics:
Stop Loss of 20% - a position price of $5.88

Profit Target of 30% - a position Price of $9.56

Time Exit - We will not hold this position through the earnings announcement. In all cases we will exit before the end of trading on 4/26.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: We hold this position in our Advanced Model Portfolio.

Source: Coinstar: Earnings Straddle For Your Consideration