Brew-at-home impresario Keurig Green Mountain Inc (NASDAQ:GMCR) was showing signs of being chock-full of nuts in Monday’s session. And if the GMCR’s price chart, pricing by option traders and historical stock reactions are correct, Wednesday’s earnings report could prove to be a difficult wake-up call for bulls.
In front of Wednesday’s earnings release, Keurig Green Mountain held the ignominious title of being the worst performing component stock within the S&P 500. Pressuring shares of GMCR down nearly 4% on the session, a rumored shake-up in the company’s R&D team gave bulls the jitters despite management refuting the story.
Reviewing what investors have come to expect from Keurig Green Mountain earnings reports and GMCR stock, the company had made a habit of beating forecasts, with the bottom-line number showing just one miss in the past three years.
In the other hand and much like a single-serving K-Cup; after what had been a decent stay as one of the market’s marquee growth names, Keurig Green Mountain’s single earnings miss was announced just last quarter. Incidentally, Navellier Ratings gives GMCR stock an overall B rating, but earnings growth, momentum and surprises, as well as sales growth have all received a grade of D.
Further and maybe showing some investor tiredness regarding the purveyor of caffeine, the earnings reaction trend has been weakening. Shares of GMCR have actually traded lower the last three reports despite beating views the other two occasions and share volatility contained to less than -5%, -7.50% and -1.50%.
Prior to this nascent reaction trend, shares of GMCR saw positive earnings reactions of 13%, 26% and 14%. And if one were to look out seven days past the event, GMCR was up an even more sizable 26% and 48% on two occasions and lesser, but still respectable 9%.
Lastly and looking to GMCR’s report Wednesday night, Wall Street is expecting profits of $1.05 per share compared to last year’s earnings of $1.05. Sales are forecasted to come in at $1.1 billion, representing a 4.5% year-over-year increase.
GMCR Weekly Chart
In front of Wednesday evening’s earnings report, Monday’s percentage drop of about 4.5% in GMCR stock sounds rather stiff in front of earnings. However, as a notoriously volatile stock, today’s bearish action shows up only as minor speck on the weekly chart shown above.
While just a speck, things have been brewing ominously for GMCR stock during most of 2015 and shares now look all but certain to head lower. Of concern technically, shares of GMCR are close to confirming a bearish breakdown of a near two-year wedge pattern.
The initial break below support occurred late last year. Subsequent action this year produced a weekly downtrend to test GMCR’s prior highs established back in 2011.
Following a first breach test of the former highs and counter rally; GMCR has spent the past several weeks consolidating laterally around the key support or more aptly, make-or-break level of technical importance; to which we anticipate will prove to be the latter.
GMCR Volatility Readings
Should shares break lower and allow our chart reading skills to appear prescient, I’d estimate $78 to $88 looks possible down the road. On the immediate horizon and more pressing, options traders are pricing in a 68% chance GMCR’s earnings reaction will be within roughly $15.75 of Monday’s closing price of $111.62 in GMCR.
The option pricing in GMCR establishes a range from about $96 to $127.50 that traders expect to hold through this Friday. Said another way, GMCR is being priced to move up or down by 14% based on 135% implieds in the pure play weeklys May at-the-money contracts.
That’s a substantial earnings reaction estimate for most any stock. But this kind of “through the roof volatility” is served up regularly at GMCR during earnings as our second volatility chart illustrates. As can also be gathered, at this rate and still two sessions away, this event is on its way to being the highest-priced report yet.
The regular May options are pricing in a similar boundary of about $16.50 based on 85% implieds and 11 calendar days left in the contract. And looking further out into June, with 46 days to expiration, still percolating implieds of 51% amount to traders estimating a 68% — or one standard deviation level — of confidence that GMCR will remain within $20.20 of current prices or $91.42 to $131.62.
GMCR Most Active Option
In Monday’s session, option trading outside the aggressive bid in GMCR implieds wasn’t terribly exciting. The weeklys May $116 and regular May $116 calls saw the most activity and finished at $4.20 and $4.75 respectively.
Volume of around 2,300 and 1,100 in the GMCR calls doesn’t lead to any knock-your-socks-off conclusions other than the order flow being net buyers playing a modestly out-of-the-money call priced inside the fore-mentioned estimated GMCR price ranges.
GMCR Bear Call Spread
To take advantage of both GMCR’s chart pattern, though apparently at odds with Monday’s options activity, and to position for a near-certain volatility crush on Thursday, I like the regular May $120/$125 bear call spread for $1.
The spread maximum risk of $4 is realized at expiration in 11 days if shares of GMCR finish above the $125 strike. That’s below the estimated one standard deviation calculation of $128.11, but the probability of the spread finishing entirely out of the money using an even slightly higher volatility calculation of 150% is around 70%.
Additionally, this GMCR spread is in keeping with our bearish technical thesis as the spread’s short $120 contract is set at recent highs and the 50-day simple moving average. While we anticipate lower stock prices out of the consolidation, this bear spread delivers some counter-move wiggle room of about 8.5% to break even. And below 7.5% at expiration the entire $1 credit or “single serving” is kept.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
