With Barnes & Noble in a Coiling Pattern, Volatility Offers Investors Two Ways to Win

NEW YORK (TheStreet) -- When I see a stock with a beta over 2.00 that has formed into my coiling pattern, I get to work on the trade setup analytics ASAP!

Such is the case for Barnes & Noble (BKS). In fact, it sports a current beta of 2.67, while at the same time its options volatilities are offered around the mid-30s.

The company's stock price has had a fair share of ups and downs over the past 5-plus years due to growth of the e-book industry, which is causing plenty of chaos for booksellers management teams such as those at Barnes & Noble.

In my household, each family member has their own e-book reader. We use the Amazon (AMZN) Kindle -- although my first reader was a Barnes & Noble Nook. While the lower cost to buy a book is a decent enticement to go e-book, the ability for me to carry a complete library almost anywhere I travel is my favorite feature. The e-book revolution is here to both stay and grow.

For a company that only a few years ago saw some analysts prematurely dancing on its grave, Barnes & Noble now has a decent balance sheet that shows no debt and $5 per share in cash. And after a string of losses, it could soon begin to show profitability, should analysts' earnings projections be on the money.

One more addition to this puzzling, relatively low options volatility for BKS now is that it has a very small float of only 45 million shares. And 7 million (15% rounded) of those shares have been sold short as of the latest reporting period. Thus, BKS has a short squeeze potential I rate as quite high.

Source: Yahoo Finance

Technically, BKS has traded between $16 and $26 over the past 52 weeks. Its one-year stochastic has a bearishly declining slope that is confirmed by a bearishly declining RSI.

BKS is a good-to-excellent candidate for a trade setup using my crisscross strangle tactic (XXS). This tactic, in order to become a profitable trade, needs the stock in question to move well enough in price in either direction during the life of this long strangle. Given the current BKS market options vols, the July expiry offers this opportunity at what I think is the optimal time to buy the premium needed to open the position.

The crisscross strangle tactic requires the options speculator to use far more capital than most trade setups: The tactic is capital intensive due to the fact that the trader must buy both in-the-money calls, as well as in-the-money puts in order to set up the position. However, due to the unique aspects of this tactic, the risk in that capital is quite low relative to the capital required to open as well as maintain the trade while opened.

Finally, the potential return on investment can be high should either the call or put rise high enough in price, if the underlying stock rallies or falls by a decent amount of points. Thus, do not take this trade if you have any doubts about the ability for BKS to move far enough in either price direction before the July expiry!

Trades: Buy to open BKS Jul 21 calls for $2.15 and buy to open BKS Jul 24 puts for $2.35.

The total capital required to open the trade is $4.50 points per strangle (XXS). However, the total capital risked during the life of the trade is $1.50. The suggested target to sell to close for a gain is a bid of $5.00 and the suggested target to stop out is a bid of $4.00. AS ALWAYS, this is a guideline and you should always stick to your trading plan and what's best for your risk/reward tolerance.

 

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Skip Raschke writes regularly for Options Profits. You can get his trades first and interact with him there with a free trial.

 

At the time of publication, the author held no positions in the stocks or issues mentioned.

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