Dialing up an earnings trade for Select Comfort
Select Comfort, $SCSS, is the maker of the sleep number bed. It started the year off with a bang, rising out of consolidation. It paused in a sideways channel in February and then released to the upside. Since mid-March it has moved in a tightening symmetrical triangle Today, ahead of earnings after the bell, it is touching the triangle for the 5th time, this time at the top of the triangle. A break higher would target a move to 37.50.
The RSI is in the bullish zone and rising. In fact there is a Positive RSI Reversal in the works, with the lower low in RSI last week without a lower low in the price of the stock. This would target a move to 35.20. Another bias to the upside. The MACD is falling, not supporting the upside. It may be bottoming though and remains positive.
There is support lower at 33.60 and 32.55 followed by 32.20 and 30.75. There is no resistance higher over 35. The reaction to the last 6 earnings reports has been a move of about 10.42% on average or $3.55 making for an expected range of 30.55 to 37.70.
The at-the money May Straddles suggest a similar $3.35 move by Expiry with Implied Volatility at 45% above the June at 36%. But there is still over 3 weeks until expiry. Short interest is elevated near 8%. Open interest is large at the 32 Put Strike and the 36 Call Strike in May. A move towards those levels post earnings may hold there for a bit.
This is typical of the earnings trades given to subscribers daily in the premium service. You can join for just $199 for 3 months, or $618 for a year and I'll throw in a signed copy of my book.
Trade Idea 1: Buy the May 34/36 Call Spread for $1.00
Trade Idea 2: Buy the May 34/36 1x2 Call Spread for 20 cents.
Trade Idea 3: Buy the May 34/32 Put Spread for $0.95.
Trade Idea 4: Buy the May 34/33-32 split strike 1x2 Put Spread for a 10 cent credit.
Trade Idea 5: Sell the May 32/36 Strangle for a $1.60 credit
#1 and #2 look for a move higher but not above 36, with the large open interest in May. #3 and #4 give downside participation and look for the large open interest at 32 in May to hold it. For the first 4 trades #1 and #3 can be done in most accounts but #2 and #4 must be done in a margin account. #5 gives a good range, profitable from 30.40 to 37.60 at may expiry. I like #2 best paired with #4 to cover both an up or down move. I also like #5.
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