Monday, March 14, 2011

Trade of the Day: Coinstar Straddle Sale

An interesting trade today in Coinstar, ticker CSTR. A trader sold April $42 straddles @ $5.15 2700x with the stock at $42.67. The trader sold an IV of approximately 51.5% and is counting on CSTR not moving more than $5.15 between now and expiration. A curious conclusion (IMO) given that the stock has recently experienced some serious volatility!

Courtesy: LivevolPro
Since pre-announcing some negative results back in January, the stock has traded in a tight range and the IV30 has stayed pretty steady at around the 50% level. The purple line, which shows the realized volatility over the preceding 120 days, ominously remains elevated near 70%.

A confluence of pivot points (shown above) at the $42 area with the monthly pivot and weekly S1 in the general vicinity, suggest some price support may occur at this level although I'm not sure I would make too much of this under these circumstances.

Courtesy: LivevolPro
Skew isn't screaming out why this trade was done, so why the heck is the trader selling this straddle???

Well, if I had to guess, I think the trader is counting on the fact there is nothing between now and earnings (earnings which presumably would occur after April expiration). A trader selling this straddle would also be counting on the company avoiding another negative pre-announcement such as the one that rocked the stock in January - something that would be hard to predict in uncertain times. The recent lows in IV30 have been around 40 so its hard to fathom that the trader would simply be putting on the trade for a 10 pt vol move, but certainly possible nonetheless.

The trade works if the stock is above $37.52 or below $47.82. If the stock is at $42 exactly, the trader will keep the credit, or nearly $1.4mm. We will have to keep an eye on this one.

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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