Here is a quick little preview of what I am going to be talking about tonight on Options Action on CNBC at 5pm:
GMCR ($52.60) reports their fiscal Q1 Wed Feb 1st after the close.
-Implied move into earnings is about 14% vs 4 qtr avg of about 22% and the 8 qtr avg of about 16%
-The stock is up 17.5% already year to date, but still down about 54% from the all time high made last year.
-Short interest remains amazingly high around 22% of the float, while Wall Street analysts remain mixed on the name with 9 Buys, 3 Holds and 2 Sells.
-The stock is up almost 7% today on bullish commentary from SBUX last night on the prospects for growth this year with their branded K-Cups.
MY TAKE: Back in November when these guys reported their fiscal Q4 I bought Put Spreads in anticipation of a miss after reading hedge funder David Einhorn’s bearish presentation on the company (read here). Here is my Q4 earnings trade from early Nov. This story kind of smells and I would probably guess that a good bit of what Einhorn has alleged could be true and at any moment the SEC, which had looked into some of their accounting practices, could re-open their inquiry. So it is probably a dangerous stock to own outright…..That Said,
This earnings event next week could be setting up similar to NFLX just a couple days ago….a once high flier that trades at a ridiculous multiple where the bears are still swirling around. If there is the slightest bit of good news you could see an epic short squeeze. A trade structure that worked very well for me in NFLX was a call calendar, selling a weekly upside call, and then buying the same strike call in a further out month. If you get a pop in the stock that is inline with the implied move the rapid vol compression on the short dated option should help off set the longer dated vol compression. IN my NFLX trade, read here, went immediately to my strikes and this trade was better than a double for me.
I AM NOT PUTTING THIS TRADE ON NOW, MERELY LAYING OUT WHAT I WILL BE DISCUSSING TONIGHT ON THE SHOW, BUT WILL LOOK TO PUT A SIMILAR TRADE ON EARLY NEXT WEEK IN FRONT OF THE PRINT.
Trade: GMCR ($52.60)Buying Feb3rd weekly/ Mar 60 Call Spread.for 1.70
-Sell Feb 3rd weekly 60 call at 1.35
-Buy March 60 call for 3.05
Break-Even On Feb3rd Expiration (next week):
-If stock is 60 or below you will essentially own the March 60 call for 1.70 and then you can look to turn into a call spread.
-If you get an out-sized move to the upside near the 60 strike, than the Feb options You are short will be trading with little extrinsic value with just 2 days left to expiration, and you will make the difference btwn the option u are short in Feb and the the one u r long in March