GMCR Report Fiscal Q4 Tonight: Collars Could Make Sense Against A Long

by Dan November 9, 2011 1:23 pm • Commentary

Green Mountain reports Fiscal Q4 earnings tonight after the bell and the options market is implying about a 16% move vs the 4 qtr avg move of about 15%.

-Tonight’s conference call will be one of the first times that management will have the opportunity to address hedge fund manager David Einhorn’s accusations of accounting irregularities (read presentation here).  

-Wall Street analysts generally fairly positive on the name with 10 Buys, 2 Holds and 1 Sell.

-Short interest is high at about 14% of the float

-the stock is up a whopping 107% ytd, but down about 40% from the all time highs made in early September.

-earnings and sales have been growing 50, 60. 70% at a clip for the last few years and are expected to be above 100% at the conclusion of this fiscal year.   The valuation of the stock clearly reflects that, trading at 52x this year and ~40x next years expected earnings.

From a Technical standpoint the fever has clearly broken and if you were looking for any real support in this stock it could be in the low 60s, a range where it consolidated early this Spring before making its monstrous move higher that almost saw a double in the stock int he ensuing 5 months.

MY TAKE: I think you have to be crazy to buy this stock regardless whether you question Einhorn’s motives as he is obviously talking his book in a major way.  If the company’s accounting practices are on the up and up then they have every incentive in the world to try to stick to this guy and create a short squeeze of epic proportion.  If you felt this way then the only way in my opinion would be to buy call spreads or call butterflys.  I don’t have the conviction to do that at the moment, but……….

Trade to consider if you were long and looking for protection into what could be a very volatile qtr and conference call:

GMCR ($68.00) Buy Low Cost Collar against Long Stock-BUY NOV11th Weekly 62.50 // 75 Collar for ~.50

-Sell Nov11 weekly 75 call at ~2.60

-Buy Nov11 weekly 62.50 Put for ~3.10

Break-Even On Nov11 weekly Expiration:

Profits btwn 68.50 and 75 make up to 6.50, 75 or higher stock is called away and you make 6.50.

Losses btwn 68.50 and 62.50 lose up to 6.00 but protected below 62.50 (losses of stock btwn spot and the 62.50 put strike you are long plus the premium paid).

Trade Rationale: you would do this if you were long the stock and didn’t want to sell maybe for tax considerations, but possibly worried about extreme downside following earnings.  This structure provides protection down about 8%.


I also want to make the point that I have no strong directional opinion in the name and do not have any positions in the name…..But i have gotten a bunch of questions today so I thought I would put something out there……