Coinstar Earnings Options Trade

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.