GMCR Is Roasting the Bears

by Tyler Craig | November 28, 2012 1:03 pm

Green Mountain Coffee Roasters (NASDAQ:GMCR[1]) is soaring 24% in midday trading as Wall Street applauds its most recent earnings announcement. For the fiscal fourth quarter the Waterbury, Vt.-based coffee company earned 64 cents a share, handily beating the Street’s estimate of 48 cents a share.

GMCR chart 300x165 GMCR Is Roasting the Bears
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 GMCR has had quite the turbulent history. From $20 to $110 and then back to $20, the volatile stock has taken shareholders on a wild ride over the past three years.

Whether the current earnings-driven surge will be the spark that ignites a new multi-month uptrend remains to be seen. Regardless, the up gap has lifted the stock back above its 200-day moving average for the first time in over a year — a promising development.

The options market has been quite active, with more than 168,000 contracts traded within the first 2½ hours of the trading day. Put volume outraced call volume, 93k to 75k.

Here are two ways options-inclined traders can play this big move — one bullish, one bearish.

Bull Trade

If you believe GMCR is heading higher in the coming weeks, you could buy a March 35-40 bull call spread for $1.95 or better (buy the 35 call while selling the 40 call). The max loss is limited to the initial $1.95 debit and will be incurred if GMCR sits below $35 at March expiration. The max reward is limited to $3.05 and will be captured if GMCR rises above $40 by March expiration.

Bear Trade

If you believe today’s gap in GMCR is a one-hit wonder and it’s likely to fall back beneath the 200-day moving average, consider entering a March 35-30 bear put spread (buy the March 35 put and sell the March 30 put) for a net debit of $2.25. The max loss is limited to the initial $2.25 debit and will be incurred if GMCR sits above $35 at March expiration. The max reward is limited to $2.75 and will be captured if GMCR falls back below $30 by March expiration.

By using March options you give yourself plenty of time for GMCR to either make the trek higher to $40 (for the bull call spread) or fall back below $30 (for the bear put spread).

At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.

Endnotes:
  1. GMCR: http://markets.financialcontent.com/investplace./quote?Symbol=GMCR

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