Playing the Green Mountain Bounce with Weekly Options

by Michael Shulman | March 14, 2012 9:24 am

keurig 630 300x225 Playing the Green Mountain Bounce with Weekly Options[1]My favorite week of the month is options expiration week – the third week of the month. This week, the universe of slightly more than 100 weekly option choices expands to 5,000 or so choices as expiration is just a couple of days away.

I typically make my weekly options trades midday on Wednesday and I do the same for expiring monthlies. The two-and-a-half day exposure is just about right given the cash returns I get from selling weeklies (typically puts).

Expiration Friday also gives me a chance to sell puts with huge premiums on “hot stocks” that are in the news and are only of interest for a two-and-a-half day trade. One of these hot stocks currently catching my eye is Green Mountain Coffee Roasters (NASDAQ:GMCR[2]).

GMCR has been in the news too much lately, and none of the news has been good. Starbucks (NASDAQ:SBUX[3]) announced a couple of days ago they are entering Green Mountain’s market with single cup coffee brewing system[4]. GMCR’s accounting is being investigated[5]. Insiders are selling[6]. Short sellers are circling. The stock just hit an annual low around $50, down from $150.

And bounced…

That is the key word … “bounced.”

Being in the news and bouncing can mean huge premiums when selling puts. The GMCR stock price is at $51.34 and you can trade the March Week-3, 50-strike puts selling for 67 cents per contract, or a potential return of 1.3% in two-and-a-half days. The charts say money flows in around $50. This translates into an incredible short-term cash generating position with a potential annual return of 69%.

But there is something even more attractive about GMCR puts. They are available at strike prices that decrease by a dollar at $50 and below.

If you do not want to risk being put the stock, you can write puts as low as $45 and still make a terrific profit. You can sell a GMCR March Week -3 48-strike and get 29 cents, or $29 a contract. This put expires on Friday after the close.

That is a 0.60% return (31.5% on an annual basis), and the biggest risk with this trade is that you would have to roll the position to a new strike or month if the stock drops another 10% before Friday. And I sense the crash in the stock is over for now.

Remember, this is a trade to generate income or cash at very low risk — I am NOT recommending the stock. If I did anything with the stock I would make it a long-term short position. That is the beauty of selling weekly options – you can make money, serious money, with little or no capital risk, with just two-and-a-half days of exposure to the market.

For full disclosure, Michael Shulman does not own GMCR or SBUX.

Michael Shulman is editor of Options Income Blue Print[7]. Learn more about trading weekly options in this free short video[8].

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/10/keurig-630.jpg
  2. GMCR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMCR
  3. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  4. single cup coffee brewing system: http://investorplace.com/2012/03/starbucks-single-serve-coffee-may-kill-green-mountain-sbux-gmcr-keurig-verismo/
  5. GMCR’s accounting is being investigated: http://seekingalpha.com/article/429441-which-catalyst-will-make-green-mountain-fall
  6. Insiders are selling: http://seekingalpha.com/article/399581-analyzing-monday-s-noteworthy-insider-buys-and-sells
  7. Options Income Blue Print: http://optionsincomeblueprint.kajabi.com/fe/13713-my-income-secret-weekly-options
  8. free short video: http://optionsincomeblueprint.kajabi.com/fe/13713-my-income-secret-weekly-options

Source URL: http://investorplace.com/2012/03/playing-the-green-mountain-bounce-with-weekly-options/
Short URL: http://invstplc.com/1nxFPFn