Make a Guarded Bull Play on GMCR Stock Before Earnings

by John Kmiecik | January 23, 2014 9:16 am

With earnings season upon us, a trader needs to be sure and be selective to avoid any surprises that an unexpected announcement can bring. However, some trades can take advantage of an expected announcement — namely, a pending earnings report. This trade idea on Green Mountain Coffee Roasters (GMCR[1]) is based on the idea that GMCR stock might have one of those volatile movements … but only after the company’s report.

Green Mountain (GMCR — $81.15): Put Credit Spread

The trade: Sell the GMCR Jan 31 77/79 put credit spread (selling the Jan 31 79 put and buying the Jan 31 77 put) for 30 cents or better.

The strategy: The maximum potential profit for this trade is 40 cents if GMCR stock is trading above $79 at Jan. 31 expiration. The maximum loss is $1.65 ($2 – $0.40) if GMCR is trading below $77 at expiration. Breakeven is $78.60 based on a credit of 40 cents.

The rationale: The options for this trade idea expire in less than two weeks, so it’s not necessarily important to examine the fundamentals of Green Mountain. That being said, GMCR stock has been on quite the volatile journey for the past few years because of those very fundamentals. Currently the coffee and coffeemaker-maker is facing stiff competition from several sources. Despite all the competitors looking to grab market share from them, GMCR has been able to keep and add several key partners like Dunkin Brands (DNKN[2]) and Lipton. In 2013, Green Mountain was able to grow revenues almost 13% over the prior year, aided by solid sales volume.

GMCR also is developing a system for soups and is partnering with Campbell Soup (CPB[3]) on this project.

With all these projects in the works, GMCR stock has been able to make it back from some recent lows back in November.

Click to Enlarge
Why this trade idea looks like a solid proposition is because of what the stock has done for most of January.

GMCR stock has moved up to the $80 area but has been unable to move much higher or lower. In fact, only one time since Green Mountain moved above $80 has it closed below $79, which is the sold strike.

Green Mountain earnings are expect out Feb. 5, which is after this trade’s expiration. And with earnings on the horizon, the implied volatility of the options is above historical levels, creating some option premiums that might be a little expensive if you are a buyer. Lucky for us, this trade idea sells premium.

I can almost smell the aroma of profit!

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[4].

  1. GMCR:
  2. DNKN:
  3. CPB:
  4. free trial of John’s live options trading room here:

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