3rd Trade Update GMCR: Closed Feb Weekly/March 60 Call Calendar for a Gain

by Dan February 3, 2012 9:45 am • Commentary

Trade Update Feb 3rd, 2012 at 9.42am:  WIth GMCR down 1.5% today I closed the Feb 3rd/March 60 call spread at 2.70 for a .70 gain.  This was slightly disappointing after getting the direction and an out sized move right, but whiffing on the magnitude.  But a winner is a winner and in a market like this where I like to be a bit contrarian in other spots, I’ll take what I can get.

I was happy to read from many of you who agreed with the idea that they did different variations with different expiration, strikes or even verticals.  So the main point here is that we keep drilling down on the idea generation process, and continue to refine the inputs we use to ultimately make our investment/trade decisions.


Trade Update Feb 2st, 2012 at 3:30pm:  Ok guys well I kind of blew this one….While I was playing for a big move, I wasn’t playing for this big of a move…with the stock up almost 24%, and way through my strikes,  it has rendered my trade kind of useless.  With the stock at $66.40 I can now sell the spread for a small profit of about .50c.  At this point I think I am gong to hold on until tomorrow and see if the stock opens down a few bucks and I can take a bit more out of it.

Some may find this interesting, and some readers actually did this, but I was contemplating yesterday afternoon by raising the strikes to the 65 line, as the stock had moved up a little since first looking at the idea on Friday afternoon.  With the stock about $66 this trade would have been cheaper to put on and would have been more profitable…..well we live and learn.


Trade Update Feb 2st, 2012: GMCR reported better than expected EPS for their fiscal Q1 and their forward guidance wasn’t as dire as some might have expected.  The stock is trading up 22% in the pre-market, to about $65, well through my strikes……this shouldn’t matter a whole heck of a lot to the trade as I am trying to capture the difference between the Feb call that I am short and the March that I am long.   One of the main reasons this trade will be profitable is the rapid decay that the Feb 3rd weekly 60 call will have following the event with just 2 days to expiration.  Any time value will quickly seep out and the call will quickly trade like stock.

For those of you interested to get a sense for actually how much extrinsic value is left in the Feb 3rd weekly call keep an eye on the Feb 3rd weekly Put, the value of that Put is essentially the amount of extrinsic value in the Call.

SO WHAT TO DO NOW FOLLOWING THE GAP?  I will look to take most of this position off after the opening as I did in AMZN yesterday and NFLX last week.  AMZN was sort of a different situation yesterday, I did think the stock would find a floor and that with the stock down 10% shorts were likely to cover, so with my Put Calendar still fairly out of the money it made sense to make a judgement to where I thought the stock would bottom.

For GMCR, this thing has over-shot the implied move and could keep going a bit and hold the gains due to its very high short interest that was about 22% coming into last night’s print. Once a time spread like this goes through your strikes your profits actually get worse the farther the stock goes through the strike because the long month actually starts to lose its extrinsic value as it gets farther away from the stock price. Although the stock has to go pretty far through before that happens significantly.



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……..so 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