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GMCR - Highly Caffeinated Options Premiums

August 01, 2012 | About:
Green Mountain Coffee Roasters (GMCR) is due to report this afternoon. Their earlier pre-announcement sent the shares tumbling, pushing implied volatility (option premiums) way up.

Even the reduced estimates are not bad on a valuation basis with the stock under $18. The consensus view for the June quarter (fiscal third quarter) is now 50 cents, and it’s $2.37 for the fiscal ending September.

gmcr-6-month-chart-with-option-prices-so

If you’re a K-cup fan and like the stock, consider a combination buy/write such as this:

GMCR at $17.98 Cash Outlay Cash Inflow
Buy 1000 GMCR at $17.98 $17.980
Sell 10 Dec. $18 calls at $3.65 $3,650
Sell 10 Dec. $18 puts at $3.75 $3,750
Net Cash out of Pocket $10,580


If GMCR closes at $18 or above on Dec. 21, 2012:

· The $18 calls will be exercised and the puts will expire worthless.

· You will sell your shares for $18,000.

· You will have no further option obligations.

· Your final position will be no shares and $18,000 in cash.

Net profit equals $18,000 minus $10,580, which equals $7,420, on a stock that only needed to rise by 2-cents from the trade inception price.

If GMCR closes below $18 on Dec. 21, 2012:

· The $18 puts will be exercised and the calls will expire worthless.

· You will be forced to buy another 1,000 GMCR shares for an additional $18,000.

· You will have no further option obligations.

· Your final position will be 2,000 GMCR shares.

Your total cost for GMCR would be $10,580 plus $18,000, which equals $28,580 divided by 2000, which equals $14.29 per share.

GMCR could fall by up to $3.69 or -20.5% without causing a loss on this trade.

Green Mountain’s 52-week range: $17.11 to $115.9

Disclosure: No position

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.7/5 (6 votes)

Comments

superguru
Superguru - 2 years ago
I remember few years back KCG was one of your recommended stocks. What is your opinion on it now?
Dr. Paul Price
Dr. Paul Price premium member - 2 years ago


I had been buying KCG recently. I'm eagerly awaiting details of today's debacle to see what impact it will have longer term.

I expect the true nick to KCG's value will be much less than Wednesday's drop. NDAQ's bungling of Facebook's IPO was almost certainly worse than KCG's problem and that stock hasn 't been devastated.

I did not buy or sell KCG today pending more information on how things will play out.

Time will tell.

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