Wall Street applauded Green Mountain Coffee Roasters (GMCR) latest earnings release by sending the stock 14% higher yesterday. And the positive reaction couldn’t have come at a better time for GMCR. The volatile momentum stock had suffered a bearish turn of events, losing a third of its value in the past three months alone.
Click to Enlarge We’ll have to see if the bulls can build on Thursday’s victory, but the earnings-induced insta-gains did wonders in improving GMCR’s technical posture.
Allow me to highlight two positives:
- While the GMCR was languishing beneath all of its major moving averages (20, 50, and 200) the week before earnings, it now sits above them. These potential resistance levels were all taken out in one fell swoop. With Green Mountain stock now above the MAs, these smoothing mechanisms might well act as support, halting future declines in the stock.
- Two key horizontal resistance levels ($65 and $67.50) also were left in the dust amid the post-earnings party. Ever since the mega earnings gap in May, the $67.50 level had become a bastion of support for the bulls. The damage dealt by its failure in October has now been healed. More recently, the $65 area has provided resistance no less than six times. Thanks to yesterday, this impenetrable ceiling is now irrelevant.
Going forward, traders can profit from GMCR’s sudden about-face by selling December bull put spreads.
Since the $65 zone should act as strong support on any pullback, you could short the Dec 65 strike put as part of the spread. To complete the position, buy the Dec 62.50 put.
The 65-62.50 bull put spread can be sold for 52 cents, allowing you to capture a max reward of 52 cents if GMCR remains above $65 by December expiration.
The max risk is the distance between strikes minus the net credit, or $1.98.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.