by John Kmiecik | August 19, 2013 8:29 am
Trading activity in the summer tends to be slower then at other times of the year. Trading volume has been lower than normal, even though we have been getting some volatility in the market as of late.
Maybe what this market needs is something to totally wake it up … and this trade idea might do just that!
The trade: Sell the Sep 67.5/70 Put Credit Spread (selling the Sep 70 put and buying the Sep 67.5 put) for 45 cents or better.
The strategy: The maximum potential profit for this trade is 45 cents if GMCR is trading above $70 at September expiration. The maximum loss is $2.05 ($2.50 – $0.45) if GMCR is trading below $67.50 at expiration. Breakeven is $69.55 at expiration based on a credit of 45 cents.
The rationale: Green Mountain is a coffeemaker that will soon be joining the Nasdaq-100 in about a week. It’s hard to say whether that alone might persuade potential buyers to purchase the stock, but it can’t hurt. Another fact that can’t hurt is the company’s recent earnings report. The company reported a roughly 18% increase in year-over-year sales, and it has yet to release its latest system entitled Bolt. The product will brew an entire pot of coffee — not just one cup — and it’s scheduled to be released sometime this fall.
Click to Enlarge However, the chart is the real reason this trade idea could work.
GMCR has a solid support area at $70; in fact, since the stock moved above $70 in early May, it has only closed below this mark one time. Green Mountain is not technically in an uptrend, but it has been able to make higher pivot lows since the early part of July.
In addition, the current implied volatility on the options is higher than its historical level. Selling overpriced options — even as part of a credit spread, like in this example — can be advantageous for the trader.
GMCR has tried to move above a resistance area around $80, and if it finally does, you can kick back and enjoy your profits with a nice cup of coffee.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.
Source URL: http://investorplace.com/2013/08/credit-spread-green-mountain-coffee-roasters-gmcr/
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