Option Watch: Nov 11, Green Mountain Coffee
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November 11, 2009
One of growth stock's flavors of 2009, Green Mountain Coffee (GMCR), is reporting its results after Wednesday's closing bell. Analysts expect the purveyor of scintillating aromas and tastes to earn $0.33 per share versus last year's $0.28.
Demonstrating an even stronger improvement on other bottom lines, shares of GMCR have managed to grow by more than 300% over the past twelve months. Additionally, as the percolating action in the stock has been brewed with occasional strong bouts of volatility around traditional buy points of 62.03 from a short "W" base in July and a more recent cup-with-handle trigger of 71.53-buyers of GMCR have been asking for more than simply refills.
In Tuesday's session, implied volatility struck a three month high near 90% for the ATM November contract. The bid has eclipsed last quarter's rush into protective call and put strategies by a narrow margin, but well-above GMCR's statistical range from the mid 40s to the low 50s.
Most active on the day, the well out-of-money November 80 call saw nearly 3,500 contracts change hands, matching its open interest. Priced at $1.75 versus a share price of 73.14, a double to expiration would require a move of roughly 14% in GMCR. However, in the immediate aftermath of the report, some of that contract's ability to reach that benchmark will undoubtedly be hampered by premiums falling prey to a volatility crush, as well as the potentially threatening theta risk.
Below in Figure 1, I've used an estimated crush of 40%, which would put the November 80 call near 55% IV and slightly above its statistical range but much closer to fair value. This will allow us to better evaluate where those bullish traders need GMCR in order to breakeven, double, bail and all the other numerous decision points which might be considered before expiration.
Figure 1: Green Mountain Coffee (GMCR) Nov 80 Call
Above, we can see traders simply long the call are going to require a percentage move above 78 approximately before they can expect to breakeven, based on the estimated volatility crush. Doubling, of course, will require a good deal more movement and is still fairly close to what the longer-term holder, well, these days it seems, would require.
Personally, this "taster's choice" of strategy would look to sell some premium in the form of a vertical at a minimum, given the richly-priced options and how far both shares of GMCR and the market have rallied. And for those with bolder cravings, modified flies of various flavors and varieties look like a better way to sample earnings, for those that indulge in that sort of thing.
Chris Tyler
Senior Staff Writer & Options Strategist
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