An Interesting Options Play For Green Mountain Coffee Roasters

| About: Keurig Green (GMCR)

Green Mountain Coffee Roasters (NASDAQ:GMCR) has had a rocky year, but for the last few months it seems to have stabilized and might be worth a second look (especially if you could make 30% or more on it with options in just two months as I propose here). First, check out a recent Seeking Alpha article Green Mountain: Stock Is A Good Brew. It might give you a little confidence in the stock.

In the interests of presenting both sides, check out the downside case, also at Seeking Alpha - Stay Away From Green Mountain Coffee. However, even this critic advises against shorting the stock.

GMCR is selling at 9x or 10x earnings and doesn't appear likely to have a big sell-off in the near future. One option investor recently made a huge options bet that the stock will move higher - see Bulls Smell the Coffee at Green Mountain. These options could return $5 million to the buyer if the stock is above $30 when the November options expire on the 17th.

The option strategy I suggest should make the 30% in two months even if GMCR falls by 10% over that time period.

I have watched this company for many years. It is located in my home state of Vermont. I used to play tennis with its founder, Bob Stiller, every week. (I don't want to brag, but I remember that I won about 90% of the matches - he seemed to be more interested in growing his company than staying in tennis shape.) I own a few shares of the stock, but my real interest is in options, and an options strategy that can make 30% in two months even if the stock falls by 10% is the kind of investment that interests me more than owning any stock.

Here is what the risk profile graph looks like for the GMCR (currently trading at just under $24). These positions cost about $2300 to put on (click to enlarge):

The graph shows that a nice profit averaging over 30% can be made in two months at any ending price on December 21st which is higher than $22, and a profit of some sort at any price higher than $20.50. This downside break-even point would mean that the stock fell by 14% from its current level.

Here are the actual positions that create the above risk profile graph (click to enlarge):

I used 10 vertical call spreads, buying December 19 calls and selling December 22 calls for about $2.00 ($200 per spread) and 5 calendar spreads at the 19 strike, buying January 2013 puts and selling December puts, paying about $.25 ($25 per spread).

A 30% gain even if my stock falls by 10% seems like a pretty good bet to me.

As you can probably imagine, I am an options nut. I believe that an options strategy can be devised that will give you an opportunity to make extraordinary gains if you can guess the direction that a stock will move, and also provide you with some protection (and profit) if you are wrong and the stock moves in the opposite direction (as long as it doesn't move too much in that direction).

Most of my personal money is in Apple (NASDAQ:AAPL) options because for about a dozen reasons, I believe that the stock is headed higher over the next few months as the company catches up with the demand for its iPhone 5 and finally rolls it out to the 120 countries it has targeted.

I created a more conservative portfolio for AAPL which should gain over 10% in two months as long as the stock falls less than $50 (I established the positions after the stock had already fallen $60). The stock has now fallen $95 on what I considered flimsy reasons, largely because it can't make product fast enough to satisfy demand - most companies would love to have such a problem.

You can see my AAPL options strategy in the Seeking Alpha article -An Options Idea To Safely Finance Your Retirement Using Apple.

Even though the stock has fallen by $30 since the option positions in this article were placed, an actual portfolio carried out with the strategy discussed in this article is slated to make over 10% in 2 ½ months even if it falls by another $20 between now and then. Most of my retirement money is in this portfolio which I believe will consistently earn me 20% to 30% each year with very little risk.

I love the flexibility that options provide. I am continually surprised by how many people (including stock brokers) know virtually nothing about options. One would think that if they knew they could make 30% in two months even if their favorite stock (e.g., GMCR) fell by 10%, more people would get on board the options wagon. All it takes is a little study.

Disclosure: I am long AAPL, GMCR. 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.

Additional disclosure: I own a few shares of GMCR and am long a ton of AAPL options.

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Tagged: , , Processed & Packaged Goods, Options
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