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Shares of Coinstar Inc (CSTR) are up more than 42% so far in 2012. However, there are now three reasons to avoid CSTR.

(click to enlarge)CSTR ChartCSTR data by YCharts

Options Activity

Option Monster reported on the high level of bearish options activity recently; more than 1,700 August 60 puts were bought while, at the same time, an equal number of August 75 calls were sold. Volume at both strikes was well above previous open interest. This trade, known as a collar strategy, will benefit if CSTR moves lower. The large trade likely represents institutional money. Institutional money is usually smarter, thus worth following. In summary, the recent options activity points to downside ahead for CSTR over the medium term.

Jim Chanos

Noted short seller hedge fund manager Jim Chanos has been shorting CSTR. Chanos believes that the business is in trouble over the long term because DVD's will eventually become obsolete as consumers switch to only streaming media. Chanos has been, without a doubt, one of the best short sellers in history. Chanos famously bet against Enron prior to the company's bankruptcy. More recently, Chanos was one of the early investors to spot the housing bubble in China. Simply put, I would not want to be on the other side of the legendary short seller.

Netflix Streaming Tops 1 Billion Hours In June

Netflix (NASDAQ:NFLX) CEO Reed Hastings recently said that the company had over 1 billion hours of streaming in a month for the first time ever. This news is evidence that the streaming market is not slowing down any time soon. Eventually, the streaming market will likely be a major headwind for CSTR as the demand for DVD slows.

Conclusion

Despite CSTR's strong start to 2012, I believe it is a stock to avoid. The bearish options activity, Jim Chanos' short sale, and positive Netflix streaming numbers are all reasons to avoid CSTR.

Source: 3 Reasons To Avoid Coinstar