Our Strategic Mindset at Top Gun Options changed two weeks ago from Market Neutral with a Bearish Bias to Bearish.
Target: Green Mountain Coffee Roasters (GMCR) trading at 23.54.
Commit Criteria: After an earnings report that knocked GMCR out of the stratosphere early in May, we entered a Bull Put Spread, selling 35 of the 25/22. We held this position until Friday expiration and exited for a nice profit as the stock wanted to pin at $25, but fell shy. We still believe that GMCR has found 'new support' around these levels and the disparity between historic and implied volatility sets up another opportunity to sell a credit spread and potentially profit.
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Charts from www.trademonster.com/tgo
Tactic: Sell 20 Jun 22/19 Bull Put Spread for a credit of .71
· Sell to open 20 Jun 22 Puts for 1.00
· Buy to open 20 19 Puts for .29
· Net credit of .71
· Max Gain: $1,420, 64% probability of retaining max profit
· Max Loss: $4,580, 12% probability of sustaining max loss. According to Top Gun Options trading ROE (Rules of Engagement), we will not risk more than 5% of the model portfolio on any one trade.
Midcourse Guidance: We will let this trade fly down range unless we see a significant shift in market sentiment. We saw a relief rally yesterday and believe the market is oversold and will trade sideways with the seasonal summer sell-off and the problems overseas.
Eject Criteria: We will close this position if we lose more than 50% of our credit. As always at Top Gun Options, we close the position whenever the Commit Criteria change.
GMCR isn't going out of business any time soon and we feel the earnings report provided an excuse to take profit on the over caffeinated stock. We plan to take advantage of this move and the increased volatility to potentially profit.
Disclosure: I am long GMCR.
Additional disclosure: We hold this position in our Primary Model Portfolio.