by Beth Gaston Moon | March 9, 2012 12:13 pm
As Jeff Reeves reported this morning in “Starbucks’ Single-Serve Coffee Could Kill Green Mountain”. Last night after the close, the Seattle-based giant announced its own at-home, single-cup brewing system, the Verismo. This is a blatant shot over the bow at Green Mountain’s (NASDAQ:GMCR) bread-and-butter, the Keurig system, which uses the not-inexpensive K-Cup refills.
In response to this news, Starbucks (NASDAQ:SBUX) is up 2.3% today, while GMCR has plunged more than 14% in morning trading. SBUX shares are at a new all-time high; GMCR is clinging to theoretical support at the 60 level (which coincides with the stock’s 20-week moving average).
Options traders were hoping for this very outcome ahead of yesterday’s announcement as they stocked up on speculative positions in both of these coffee names.
During Thursday’s session, GMCR saw 80,000 put options trade versus 55,000 call options, for a put/call ratio of 1.45 and total single-day options volume of 135,000, which is more than triple the stock’s daily average option volume of 42,000. Within the first 90 minutes of trading today, 65,000 options had changed hands in GMCR (31,000 calls and 34,000 puts).
One trader bought a short-term “synthetic short” on Green Mountain yesterday, buying 2,300 March 55-strike puts and simultaneously selling the same number of March 67.50-strike calls for a net debit of 38 cents per spread. This is one way of gaining short exposure to the stock via options without borrowing it outright. If GMCR continues to founder, this spread trader can close this trade at a handsome profit, turning his $87,400 investment into shy of half-a-million dollars. Not bad for less than 24 hours or so.
SBUX, meanwhile, saw 26,000 calls and 16,000 puts change hands yesterday, versus average daily option volume of 15,000. Notable activity was seen on the March 52.50-strike call, where nearly 4,000 calls traded on open interest of just 146 contracts. It appeared as though these options were purchased for just 12 cents a contract.
The April 52.50 and July 52.50 calls were active as well, with traders buying these options for average premiums of 65 cents and $1.90 per contract, respectively. In all cases, these calls are looking for SBUX to rally above the $52.50 level before the respective expiration date of the purchased option.
Long calls have unlimited upside through expiration if the underlying stock rallies, and losses are capped at 100% of the premium paid. Breakeven for these trades, on average, is $52.62 for the March option, $53.15 for the April trade and $54.40 for the July-dated options. (The longer-dated calls are more expensive because they contain more “time value” and, therefore, have more time in which they can make a move.)
Of course, all of these trades could have backfired if the Starbucks announcement were different than expected or if it fell flat. But this time around, those who were expecting that good news for SBUX would mean bad things for GMCR were exactly right.
As of this writing, Beth Gaston Moon owns shares in Green Mountain Coffee Roasters.
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