Earnings Trade for the Stars

• Posted by Greg Harmon
• on October 5th, 2011

Constellation Brands ($STZ) reports earnings before the open Thursday. It has been in a down trend as exhibited in the daily chart below, and is testing the upside resistance of that downtrend. If it can get above it it has further resistance at 19.50 and then 20. The Moving Average Convergence Divergence (MACD) indicator is crossing positive for the run into earnings and the Relative Strength Index (RSI) has yet to break into bullish territory.

On the weekly chart the rising trend support line is evident, and it recently bounced there at 17.70. The MACD is slowly improving on this timeframe and the RSI has held around 40 on the move lower since April. Not bullish, but not bearish either. If it breaks lower there is support at 17 followed by 16.25 and 15.35. Putting the two charts together shows a bounce off of support and now at resistance of a triangle or tightening wedge. The earnings catalyst may spit this stock out one way or the other.

The last four earnings reports the stock has moved 7.8%, 7.8%, 5.5% and 3%, respectively, averaging 6%. The last report on June 30 though it moved higher an additional 4.8% on the following day. The options market shows that implied volatility is not elevated and in the front month or relative to historical volatility. An approximation of the Straddle prices in about a 9% move by the October Expiry, or only about 30c more than the previous moves in one day, with an extra 2 weeks to perform, and that theta staying with the stock initially.

Trade Idea: Buy the October 20/17.5 Strangle for 55 cents.

Buying the October 20 Strike Call and buying the October 17.5 Strike Put, for 55 cents gives a breakeven on a move to 20.55 or 16.95 at Expiry. But because it has two weeks to go after reporting, you can sell the option opposite of the direction of the move immediately recovering some cost and either sell the other option if the whole package gets over 55 cents or wait til expiry and sell the winner. Having risked just 55 cents you can also stop this trade out in a manner near break even Thursday if it does not move due to the two weeks of time remaining.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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