With former 2011 growth high-fliers Netflix (NFLX) and Soda Stream (SODA) both recently breaking out from their low laying corrective bases and “handling” those gains quite constructively; could a similar technical situation in Green Mountain Coffee Roasters (GMCR) offer bulls a triple K-Cup-sized boost as well?
Technically, GMCR’s 70% and three and one-half month drop from its recent well-percolated highs is in keeping with the commonality that most growth stocks, once out of favor or umm, flavor, will lose 70% or more of their market capitalization. That stat comes courtesy of Investor’s Business Daily, an outfit that tracks that sort of trading data on growth stocks and whom we pen some daily options commentary for on their site.
Additionally and supportive of higher prices, with shares up about 8% Tuesday, the action has GMCR staging a Bollinger Band / 50SMA breakout from a rather uncharacteristically tight lateral consolidation. There’s also short interest of about 25% according to the latest findings on Yahoo Finance. The total as of the end of December translates into a short-to-cover ratio of 5 days based on GMCR’s average stock volume.
For the naysayers seeing a trifecta and another expresso-like price jolt to the upside as unlikely, Profit Source’s Elliott Wave doesn’t agree with Tuesday’s wake-up call for bulls. On the daily, it shows an existing W4 EBOT sell signal from mid-December; though a grand-looking weekly chart does offer up fresh, very well-roasted all-time-highs come 2013.
Figure 1: GMCR 8x Feb 52.5 / 55 Bull Call
Lest traders be too optimistic, they might be reminded most growth stocks, along with the 70% price shellacking now secured in GMCR, never go on to see those former highs again. Further, the fore-mentioned bearish, heavy short interest doesn’t exist because investors expect the stock to move higher. In the end, shorts are generally viewed as the more sophisticated species regarding bulls and bears.
Personally, we like to think it’s the option hedge hogs that make the most sense and cents of trading opportunities by using softer delta strategies to exploit sometimes hot and sometimes not, stock activity in the underlying. On that note, we like the idea of a vertical spread for bulls. Shown above is one such position using the slightly out-of-the money February 52.5 / 55 call combo on 8 contracts. Priced for just less than $1.00 per spread or 4% of unmanaged risk on a hypothetical $20K; it’s just one of the nice blends of compromise and smarts traders can enjoy served up in a nice little package and maybe just like the once, very hot K-Cup.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
