by John Kmiecik | June 3, 2013 8:36 am
Green Mountain Coffee Roasters (GMCR) has certainly seen its ups and downs over the last several years. After the stock bottomed out toward the middle of last year, it has been steadily recovering.
Let’s take a look at the story and look for an options play in this recaffeinated stock.
Simply put, the stock has been recovering because earnings continue to grow. The market evidently realized that expired patents would not hurt sales, and Keurig brewers continue to become more and more popular. Just this past week, Green Mountain announced another coffee partnership that will create containers usable in Keurig brewers. The company already has a successful partnership with Starbucks.
The stock looks poised for continued strength — a bull call spread sets you up nicely for gains in such an event.
With GMCR trading around $73.13, buy the June 75/80 bull call spread (buying the June 75 call and selling the June 80 call) for $1.45 or better.
The maximum potential profit for this trade is $3.55 ($5 – $1.45) if GMCR is trading above $80 at June expiration. The maximum loss is $1.45 (or what was paid for the spread) if GMCR is trading below $75 at June expiration. Breakeven is $76.45 at expiration based on a cost of $1.45.
Taking a look at the chart, the stock rallied hard after earnings were announced in early May. The stock then stalled out around $80 and was unable to successfully move past that level, instead declining back down to a previous pivot level at $70. Since the decline, the stock set up a nice reversal pattern (bottoming tail or hammer candle) and has started to rise again.
An obvious target for the stock would be that previous level, which is now resistance of $80. Have a cup of coffee and relax — you have three weeks until expiration.
At the time of expiration, Kmiecik had no positions in the securities mentioned.
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