Tuesday, November 27, 2012

A Speculative Earnings Play on GMCR

CCI does not usually "play" earnings, but decided to take a speculative flyer today....uh....I meant to say made a highly uncorrelated options trade.

Green Mountain Coffee Roasters (GMCR) is a much discussed and often traded provider of specialty coffee and coffee makers.  Earnings were planned for release after the bell today.  Traders had driven the implied volatility on weekly options (expiring in three days) well over 200%.   CCI was tempted to sell some premium at those levels, but instead decided to sell premium in the Dec options.  The implied volatility in these options was still significant (around 100%), and it seemed that the extra duration might provide a better chance for the stock to settle into a wide range.

With GMCR trading around $29 this afternoon.   CCI sold both the Dec. $20 put and Dec $36 call. This  straddle was sold for a combined credit of just under $1. That is the max return for the trade.  This also  means the trade does not start loosing unless the stock is below $19 or over $37 at expiration.  (about 35% down and 28% up).   Beynd those levels, the position loses dollar for dollar with the stock move. Of course, those are the results if held until expiration.  After the earnings announcement, this high implied volatility also means there is a high probability that the trade will be tested on one boundary or the other.  As the stock gyrates around after earnings,  CCI will be looking for opportunities to either harvest a profit or spread off some of the risk of the trade.  Obviously this is a speculative, risky, and "uncorrelated to anything" trade.   CCI did this trade in very small quantity.  That means the outcome of this trade will not materially move the needle on the overall portfolio.  However, It might represent a good opportunity for readers to monitor how a high implied volatility type of options play might be used as an alternative way to generate income.

* * * Results  ** *

FYI, GMCR reported  earnings after the bell.  The headlines appear to be positive and the stock has moved up near the $36 leveling after hours trading.  Hence, as expected it certainly appears this position will be tested on the top end tomorrow.  We will have to monitor the situation closely and potentially adjust the position.

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