Diamonds In Play With Valentine’s Day is Over – Blue Nile Earnings Trades

• Posted by Greg Harmon
• on February 15th, 2012

One stock you are probably not looking at for earnings is Blue Nile, $NILE. The stock got hammered last quarter losing 32.7% of its value and the CEO resigned about that time as well. But a look at the chart shows that there are some great support and resistance lines to trade against and create a trade. After breaking out of a megaphone pattern at 42 it is back-testing it today, just cracking through as I write this. It has resistance higher at 44.05 and 48.75, the triple top, followed by 50, 52.40 and 58. Support below 42 comes at 40 and 39 followed by 37.10, 36.15 and 35.50, with big support at 32. The Relative Strength Index (RSI) is bullish but falling while the Moving Average Convergence Divergence (MACD) indicator is fading and about to cross negative. There is a short term bearish bias to this chart. It has moved on average 11.5% over the last 6 earnings cycles, and still 7.2% if you toss the big move last quarter out. That makes for a range of 38.4 to 44.60 on the tighter measure and 36.55 to 46.45 on the broader. The at the money straddle is even wider implying a move of $6.40. Implied Volatility (IV) on the 2 day options is obscene at 222% compared to the historical at 47% and the March options at 84%. Expect some bleed of IV after reporting for sure. Oh, and convinced it is going lower? There is something like 33% short interest in the stock to fuel a short squeeze if it starts to move. And you were having fun playing Apple, $AAPL.

Trade Idea 1: Sell the February 35/50 Strangle for 1.15
Protection from 33.85 to 51.15.

Trade Idea 2: Sell the February 30/35/50/55 Iron Condor for 80 cents
Caps the upside and downside risk and still gets a 2% credit

Trade Idea 3: Buy the February 40/35 Put Spread for 1.85
If you wish to play the downside bias.

Trade Idea 4: Buy the February 40/35 Put Spread selling the 45 Calls for 15 cents
If you wish to play the downside bias cheaper.

I am playing trade 2

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