Coinstar is a pretty neat company.
A few years ago, I saw the Coinstar coin changing machines in the supermarket and thought to myself who would a pay 7% commission to get their coins counted. Then I saw that there was no commission for having the coins converted into a gift certificate and I was hooked!
Then the Redbox DVD rental kiosks started popping up all over the place, I first noticed them at McDonald and then at the supermarkets too. Then I find out that they are owned by Coinstar too.
Looking at the financial statements you will see that the DVD business is the majority of their income and the coin counting is much smaller. They should change their company name to Redbox from Coinstar.
Coinstar will be announcing earning on Thursday (July 29th) after the market closes.
Here is the chart of CSTR.
As you can see from the chart, it is going up. Notice the jump the stock had at the end of April. The move in the stock came from their earnings announcement last quarter.
The concern with CSTR is a reflection of what happened to Netflix (ticker NFLX) after the company announced earnings last week. Its stock dropped 13.50%.
Netflix is an online DVD rental company, also competing with Blockbuster and Hollywood Video. Netflix also offers subscribers the ability to watch videos online. Netflix is also moving into online movie delivery and is working on the technology to have movies delivered to the computer super fast.
So why did Netflix stock drop 13.5%. The official word on the street is because the missed analyst estimates on revenue.
CoinstarPresident Mitch Lowe recently said in an interview that they too are looking into streaming video to compete with Netflix. Here is the Bloomberg Article.
Coinstar has a unique competitive edge that Netflix doesn’t have. Netflix can only deliver the videos online or through the mail. Coinstar customers always go to the store to get the video. In theory it is easier to have the videos mailed to you but if it is 6 o’clock at night and you decide to watch a video then you can not wait for the DVD to be mailed to you. You end up going to the Redbox at your local supermarket or McDonald’s and rent it right there.
The Trade
I would look at a vertical call spread. Buy one call and sell another call at a higher strike price. The $48 straddle price is $4.80 – $5.10 meaning the stock can move as much as 10% before expiration.
Look at the $45 / $50 vertical call spread which is currently priced at $2.50 – $2.80. If the stock moves above $50 then the spread will be worth $5 for almost a 100% profit.
Obviously a verical call spread would be put on to take advantage of a move above $50.
The net debit is $2.50-2.80, so the risk is say $2.65 on average.
The possible reward is $5, so this trade has a $5 / 2.65 reward risk ratio.
However, given that call & put premiums are typically bid before earnings, wouldn’t it make more sense to sell premium instead?
Also, any consideration for a possible bearish trade? If I apply an e-wave count to CSTR, I can count 1 down from 59.43 to 49.65 (9.78), 2 up from 49.65 to 54.76 (5.11 or 50% retrace of 1), 3 down from 54.76 to 41.86 (12.90 or 1.32 x 1), and current movement now a possible triangle in 4, which could resolve with equal distance to 1 of 9.78 for the completion of 5 down. A likely catalyst could be the earnings release. This would target to 37.72 if 5 = 1. This would also coincide with the gap fill at 37.50.
If the bearish scenario has greater probability than the vertical
call spread, perhaps it makes sense to consider buying the August 45′s, selling the August 40′s for a net debit of $1. If the ewave count is correct & the gap is targeted on completion of 5, then the profit on this spread will be $5 vs. a risk of $1… you could do this trade 3 times over & still have approx. the same risk as the call spread. However, if the trade comes off, then you have 3 times the reward.
Obviously this is not without risk.
Thank you Dan for the great analysis! I have to admit, I am not that well versed in Elliot Wave Theory.
There is definitely the bear side. I just felt better going neutral -> Bullish. (Some people have made good money doing the opposite of me
)
I usually try to stay closer in the money, this way, if we wake up Friday morning and the stock hasn’t moved, at least the implied volatility crash will not kill the value of the contracts.
Neither am I! Just learning it really…obviously there could be alternate counts.
One possibility is that the entire movement from Dec 2009 to the June high @ 59.43 is a primary wave 3 up of the longer term uptrend, with the current choppy move from 59.43 to current a 4 before a 5 up to complete the primary trend (I’m looking at a weekly chart). This would play into your 45/50 scenario.
fwiw, after posting my analysis I did the bear spread just for the heck of it in very small size (I’m a small fish). risk = $2.30, reward = $5 x 2. Probably too good to be true…:)
$2.30 in the $50 / $45 puts is a much smarter trade than two times $1.00 in the $45 / $40 puts. IMHO.