by Michael Shulman | March 14, 2012 9:24 am
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).
GMCR has been in the news too much lately, and none of the news has been good. Starbucks (NASDAQ:SBUX) announced a couple of days ago they are entering Green Mountain’s market with single cup coffee brewing system. GMCR’s accounting is being investigated. Insiders are selling. Short sellers are circling. The stock just hit an annual low around $50, down from $150.
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. Learn more about trading weekly options in this free short video.
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