There has been a lot of discussion about whether or not Green Mountain Coffee Roasters (NASDAQ:GMCR) has really began to turn things around or not. A lot of good things are beginning to happen, but at the same time red flags remain, as highlighted by First Adopter in a bearish outline of Green Mountain. While many of these points have legitimacy, I think there is more upside risk than downside risk left. Therefore, I am taking a slightly bullish position in the stock.
I say "slightly bullish" because there are a lot things that have to go right for Green Mountain to retain its powerful grip on the K-Cup industry. With the expiring K-Cup patents, Green Mountain has and will continue to see increased competition from rivals such Starbucks (NASDAQ:SBUX) and Kraft (KRFT), the maker of Maxwell House coffee brand.
However, my options trade is mainly in place to take advantage of the elevated volatility levels, rather than an outright bullish position in the name. These elevated volatility levels are because of a pending earnings announcement for Tuesday, Nov. 27, after the market closes. Let's take a look at the trade and then discuss some of the components in a little more detail.
The Options Trade
Sell 1 GMCR Nov. 30 (weekly) 30 call at 1.70
- Implied Volatility:155
Buy 1 GMCR June 30 (weekly) 30 call at 4.35
- Implied Volatility: 66
- Net Debit (Max Loss): $265
Above, I included the volatility skews in the different options, 155 for the front-month (weekly) option and 66 for the back-month option, respectively. Green Mountain already trades with an elevated level of volatility, but 166 is extremely high. The trade could be put on with the 28 strike instead of the 30, but GMCR will likely move a substantial amount after earnings, making it easy to lose money if Green Mountain moves too far in either direction.
As I stated above, I feel as though there is more upside risk than downside risk in Green Mountain -- and therefore am taking a slightly bullish stance. The goal is quite simple, for Green Mountain to advance to approximately $30 allowing the short weekly option's price to collapse, something that's known as "vol crush."
The long back-month option will not suffer from a vol crush like the short front-month option will. If Green Mountain does advance to about $30 per share, it will be a rise of approximately 8%. If this move does in fact materialize, covering the short option will be most appropriate. Considering it has such a short time until expiration already, the short seller is susceptible to gamma risk, which is the speed at which the option's delta will move.
It is important to understand that this makes it a riskier position and is not for everyone or new options traders. It might be more valuable for some investors to place this trade in a simulated account in an attempt to learn this strategy better without putting real money on the line. For those who want less gamma exposure, you could sell the GMCR Dec. 30 call instead, for 2.10 or $210.
There are several reasons aside from the upside risk outweighing the downside risk for which I chose a slightly bullish stance. First, GMCR recently hired Brian Kelley as the new CEO, who was previously named the president of Coca-Cola Refreshments. I think Kelley will offer much needed aid at Green Mountain and will certainly be more helpful during the conference call after its earnings announcement. Also, Green Mountain has been able to snag a few analyst upgrades going into its earnings report, something that has been hard to come by for the struggling specialty coffee vendor.
Another big reason I have liked Green Mountain of late is the recent insider buying. Insider buying or insider selling can usually tell other investors where the stock may be headed. Selling can be for a number of reasons. Perhaps the seller needs some money for personal or tax reasons, or maybe he or she has been a long-time shareholder and will use the sale of shares as extra income. Another possibility is the seller might think the stock is headed lower, thus selling at a higher price. But when insiders are buying, it's for one reason and one reason only: They think the stock is going higher. Below is a table of the recent insider transactions from Aug. 6 through Aug. 30:
Number of Shares Purchased
Number of Total Shares
Date of Purchase
Average Purchase Price
Jules Del Vecchio
Jules Del Vecchio also exercised options for a total of 20,250 shares and has not sold. While some of these purchases are not overwhelming, it is much more reassuring to see insiders purchasing rather than selling, like we saw before Green Mountain's infamous fall from the $100 price range it once traded in. As shown above, most of the purchases took place in the $23-$24 price range, while Green Mountain's most recent closing price was at $27.77 on Wednesday.
There's always a possibility that GMCR can fall after it reports next Tuesday. In this case, the short weekly call will become worthless quite quickly, in which covering the short call would be most logical. Depending on how far it falls, selling the December call might make the most sense. Either up or down, selling calls to reduce the overall net debit of 2.65 would be very effective, especially with the high premiums GMCR options typically fetch.
Look for a follow-up article I will put out on what to do next, depending on Green Mountain's earnings announcement.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.