Have you heard of the “pairs strategy” before? The basic idea is a trader positions long an undervalued security relative to a peer that’s simultaneously shorted due to its more dearly-than-normal pricing. If an anticipated move back towards fair value occurs the trader can unwind for a profit with some combination of gains from the short, long or both. A classic example of a pairs duo might be Coca Cola (KO) and Pepsi (PEP).
But what about a situation when two similar stocks, albeit not necessarily competitors, have traded like peas in a pod and now reflect a rather sharp break in that trading relationship due to earnings in one and the other company’s results “on tap” shortly? We’d see the opportunity to forgo the pairs strategy and instead look for a limited risk option position to exploit the expected move in something akin to a sitting duck.
One relationship in which this set up looks to hold some merit and may be worth further homework focuses on SodaStream (SODA). One of 2011’s first half, hot growth stories, SodaStream manufacturers and sells niche, home carbonated beverage machines. It’s the kind of product, in our estimation, that aside from competition popping up, most consumers have fun with for a while; then put it away in the closet before it eventually goes into the garage sale pile year's later.
Other than our brief but obviously not-too-impressed and bearish-leaning analysis; why on earth would we see SODA as a short at present? We have four words for you, Green Mountain Coffee Roasters (GMCR). We wrote about GMCR this week in front of its earnings release and detailed why we thought the niche single K-cup coffee provider and fellow, first half growth star turned technical flamer was likely to see yet another rousingly strong, post-earnings reaction in its shares.
Figure 1: Green Mtn. Coffee Roasters (GMCR) & SodaStream (SODA) Overlay
While our article wasn’t aimed at a bearish reaction (well, maybe secretly); that’s ultimately the way investors saw fit to take shares of GMCR as downside guidance grounded shares by nearly 50% on Thursday. Shown above in Figure 1 we’re looking at a daily overlay chart showing shares of GMCR compared to SODA since both began their swift fall from the good graces of growth stock stewardship back in the second half of 2011. Since the feel good technical tops of both stocks, the technical patterns of despair and hope have played out quite similarly as represented by our annotated directional arrows…well, until Thursday.
On Thursday and as GMCR shares were crushed or umm, grinded down into two year lows and prior to its pre-go-go-growth stage, SODA played out sort of sympathetically. That day, SODA broke near-term support comprised of a month-long consolidation and fell nearly 10%. However, the fallout is still well north of its own November 2011 “despair” lows, which GMCR took out by more than 30%.
What’s more, if we compare where GMCR ended, back at its October 2010 lows and dare look at SODA’s own November 2010 IPO lows of 23.15; that type of 32% drop from Wednesday’s closing price of 34, seems all the more approachable, if history dares repeat itself. And with next Wednesday morning’s earning’s “on tap” for the soda provider and past post-earnings reactions the past year also mostly sympathetically large [23.46%, -33.79%, 5.63% and -14.21%] like with GMCR; bears and hedge hogs have a strong potential catalyst to consider when looking at limited risk option strategies.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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