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Coinstar Can't Shake Option Skeptics

The growing appetite for CSTR puts could translate into a contrarian boon

by 8/16/2012 12:04 PM
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Despite today's surge, option traders are still placing bearish bets on Coinstar, Inc. (NASDAQ:CSTR - 52.75). Around midday, the uptrending equity has already seen roughly 18,000 puts change hands -- outpacing CSTR call volume, and more than nine times the stock's average intraday put activity.

Most popular has been the now out-of-the-money August 50 put, which has seen about 10,500 contracts traded on open interest of fewer than 1,600, pointing to newly initiated positions. Plus, two-thirds of the soon-to-expire puts have crossed at the ask price, suggesting they were bought. By purchasing the puts to open, the buyers are expecting CSTR to fall back beneath the $50 level before the closing bell tomorrow, when August-dated options expire.

However, as my colleague Elizabeth Harrow noted yesterday, pessimistic positions are nothing new for CSTR. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day put/call volume ratio of 1.04 -- in the 80th percentile of its annual range. In other words, option buyers have scooped up CSTR puts over calls at a much faster-than-usual clip during the past two weeks.

As alluded to earlier, the shares of CSTR are on fire today, soaring 9.4% to explore the $52.75 neighborhood. What's more, the stock is on pace to end north of both its 10-day and 20-day moving averages for the first time in more than a month. This duo of trendlines ushered CSTR to a record high of $71.82 in early July, and could once again emerge as support.

Daily Chart of CSTR since May 2012 With 10-Day and 20-Day Moving Averages

Bolstering the security is merger-and-acquisition buzz, after the New York Post said Coinstar's alleged buyout talks with a private-equity firm are heating up. However, Coinstar executives haven't yet commented on the rumors. Against this backdrop, the aforementioned August 50 put buyers could be betting on the acquisition-related optimism to peter out relatively soon.

On the other hand, should CSTR extend today's upward momentum, an unwinding of skepticism in the options pits could add contrarian fuel to the equity's fire. In the same vein, short interest represents a healthy 29% of CSTR's total available float, and would take around four sessions to unwind, at the stock's average daily trading volume. A short-squeeze situation could also amplify buying pressure on the shares.


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