by John Kmiecik | October 4, 2013 9:12 am
Little did anyone know for sure how this government lockout would affect the markets. In the past, the effects were not as pronounced as they seem to be this time around. But then again, times are different. This trade idea takes advantage of both a weak stock — Green Mountain Coffee Roasters (GMCR) — and a weak market.
The trade: Sell the Oct 82.5/85 Call Credit Spread (selling the Oct 82.5 call and buying the Oct 85 call) for 30 cents or better.
The strategy: The maximum potential profit for this trade is 30 cents if GMCR is trading below $82.50 at October expiration. Both call options would expire worthless. The maximum loss is $2.20 ($2.50 – $0.30) if GMCR is trading above $85 at October expiration. Breakeven is $82.80 at expiration based on a credit of 30 cents.
The rationale: Green Mountain has been one of those stocks that have been difficult to figure out. About a year ago, GMCR stock was trading just below $25; now it is trading right around $75. The company generally sparkled around earnings time, but the company’s stock evaluation means that earnings growth rates need to be high for several more years to justify the current price. In fact, David Einhorn of Greenlight Capital has been shorting the stock for quite some time and just recently said it still looks good as a short. He mentioned the competition is increasing and its market share in stores is declining.
Click to Enlarge But the real reason this trade idea might look good to you is because of the chart.
At the end of September, Green Mountain stock broke an area of support around $80 on its way lower. Just this week, GMCR is flashing a potential sell setup that could possibly move the stock lower. Now that Green Mountain stock is below $80, that former area of support can be considered possible resistance in case it tries to move higher again. Also, the 50-day simple moving average is just above $80 and below the short strike.
The implied volatility of the options are also above historical levels, meaning the premiums are inflated.
Two forms of resistance, high implied volatility and a potentially weak market combine to make a solid foundation for selling a call credit spread.
The best part of waking up might be profits in your account! (Oops. Wrong company.)
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/2013/10/credit-spread-green-mountain-coffee-roasters-gmcr-2/
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