GMCR Options Jump Before Earnings

by Alex Hanson | February 2, 2012 11:00 am

Have you also started to notice more and more of those Keurig K-Cup coffee makers in friends’ homes? This popularity is working its way down to the bottom line of Keurig’s parent, Green Mountain Coffee Roasters (NASDAQ:GMCR[1]).

After Wednesday’s close, GMCR announced first-quarter earnings of 60 cents per share (excluding items), a whopping 22 cents better than analysts’ consensus expectations. Revenue more than doubled, to $1.16 billion, versus estimates of $1.06 billion.

Nice application of the Gillette safety-razor model — create a product that requires users to forever buy more blades (or in Green Mountain’s case, more proprietary refills for their coffee makers). K-Cup Pack sales alone zoomed 115% higher during the last reporting period, to $716 million. (So much for sustainability[2].)

On the downside, the company expects earnings in the range of 60 to 65 cents per share, versus 72-cent estimates. Investors seemed to shrug off this forward-looking news in favor of the first-quarter report. The shares chugged more than 15% higher in after-hours trading activity.

With more than 26 million shares sold short[3], a short-covering rally could keep the stock moving higher over the short term. The stock’s short-interest ratio currently reflects that it would take 4.6 trading days to buy back all of these shorted shares. That’s enough for a moderate short squeeze[4].

Before all of this earnings excitement, option players were trying to hedge their bets, and the GMCR trading pits were crowded. Roughly 140,000 options changed hands during the session — 73,000 calls (which are typically bullish when purchased) and 67,000 puts (typically bearish when bought). Compare this volume with the mere 41,000 GMCR options that traded on the company’s earnings eve.

Investors were looking very short-term, as the lion’s share of yesterday’s volume was contained within the February series. The most popular calls were the weekly options that expire this Friday — between the 55, 60, 65, and 70 strikes, 22,000 options changed hands. On the put side of the weekly options series, the 40, 45, 50, and 52.50 option strikes together comprised 16,500 options traded.

GMCR closed the regular session at $53.63 before the after-hours activity. So traders were fixated on out-of-the-money calls (calls with strike prices above the current stock price) as well as out-of-the-money puts (puts with strikes below the current stock price). Out-of-the-money, very short-term options can be fairly cheap at the outset, but very risky if the stock moves against you or volatility drops[5] suddenly.

Besides these weekly options, other popular choices included the February 65 call (with almost 9,000 options traded) and the February 35 put (far out-of-the-money and with almost 6,000 contracts changing hands). Volume in the March and later series was considerably less impressive.

While after-hours trading isn’t necessarily indicative of the next day’s behavior, it now looks as though short-term put buyers may find themselves in possession of some pretty cheap options, while short-term call buyers might just be patting themselves on the back.

The author is long GMCR.

  1. GMCR:
  2. So much for sustainability:
  3. sold short:
  4. short squeeze:
  5. volatility drops:

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