GMCR: Report Q1 Tonite, Could Be Lining up Similarly to NFLX, Gonna Stick With A Structure That Has Worked

by Dan February 1, 2012 2:26 pm • Commentary

Trade Update Feb 1st, 2012:  GMCR reports fQ1 tonight after the bell and if u can believe it the implied move has ticked up a tad to almost 16.5%!   The main thing this tells me is that this thing is gonna go one way or another in a big way…..while I obviously have no clue what the company will report, I think the only way to make money on this event is by picking a direction…..and this is where I have to rely on my process and the inputs that I use to arrive at my trade decisions……

At this point with the stock at $54, the 60 strike that I isolated last Friday is about 11% away, which still offers a decent risk reward if you get the direction right…….The main reason I am going to lean long here is that the stock is down so much (not saying if they disappoint it doesn’t go back to $40) but if there is any real reason for the shorts to cover this stock will be up 10% in a snap.  Short interest, even after last year’s plunge sits at 21%

TRADE: GMCR ($54) Bought Feb 3rd weekly / March 60 Call Spread for 2.00

-Sold 1 Feb3rd weekly 60 call at 2.15

-Bought 1 March 60 call for 4.15

MAX RISK 2.00, if the stock is 60 or below on Friday’s weekly expiration the Feb will expire worthless and you effectively own the March 60 call for 2.00.

If the stock spikes tomo above the $60 level then you make the difference btwn the option that you are short and the option that you are long.

CAVEAT:  Some of you who have been readers for a while know that I can be a creature of habit and I stick with something that works until it doesn’t……in this case this calendar structure has worked into earnings very well on NFLX last week and today in AMZN…… I am kind of pressing my luck a little here….Obviously I have to get the direction right but even if I don’t I will likely be able to salvage some premium and the trade won’t be a total loss, unless the stock craters. This trade structure has been working well in this new volatility environment.

So I guess my point is I am sticking with something that is working around an event and specifically in controversial names. But I think it makes sense to reduce size as I am kind of pressing it, at least as far as the structure is concerned.

Previous Post Jan 27th, 2012: GMCR: Report fQ1 on Feb 1st, Could Be Lining up Similarly to NFLX

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.


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