Skip to main content

Bullish GMCR Options Activity

After the close on Tuesday Green Mountain Coffee Roasters reported better than expected fourth quarter earnings that sent the stock up 27% yesterday. One trader decided to play the rise in the stock with options, and bought 24,000 Dec. 33 calls for $3.85 with the stock at 35.89. This is a bullish bet that the stock will appreciate by at least 2.7% over the next 22 days.

This bullishness comes after GMCR reported EPS of $0.64 versus expectations of $0.48, net sales increased 33% year over year, and next year’s guidance was raised. GMCR has been beaten down by the market and is currently 68% off its all-time high from 2011. The stock’s downfall began in 2011 when David Einhorn made a strong bearish case for the stock at an investment conference. His thesis for shorting the stock was the K-Cups are more expensive than buying traditional coffee grounds and wouldn’t catch on with consumers making the company’s growth unsustainable and the stock overvalued. Then in April of this year Starbuck announced it would be entering the single serve coffe market as a competitor to GMCR, which sent shares tumbling further.

However, this earnings report suggests that the increased competition is not hurting GMCR as much as anticipated and that consumers are accepting the idea of K-Cups, along with their price. Years ago critics of Starbucks said the company’s business model would fail because its coffee was overpriced, but today few complain of Starbuck’s prices because consumers have adjusted to Starbuck’s prices. GMCR is a similar story and the fact that Starbucks is entering the field goes to show how mainstream the single-serve coffee industry is.

The pop in the stock yesterday was primarily driven by short covering. Short interest has been building in the stock since this summer and peaked at 33% at the beginning of November. This stock is likely to see some analyst upgrades after this blow-out quarter, which could drive more short covering in the near term and send prices higher. I don’t necessarily want to own the stock here, now that it is already over 25% off its lows, but would be willing to take a chance that the stock continues to appreciate off of its newly found momentum with some calls.

Comments

Anonymous said…
You should enable subscriptions on Facebook so that people can share your blog posts on Facebook, that way you will have more people visiting your page and Twitter.

Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…