This morning Green Mountain Coffee Roasters (GMCR) fell more than $2, apparently because of a negative article about the company published by Barron’s on Saturday. I submitted an article to Seeking Alpha in which I argued that Barron’s had inappropriately used some statistics and made some faulty comparisons of GMCR’s p/e ratios and their competitors.
I’m not sure if my article really turned the market around, but in the first two hours after it was published, the stock went from being down $2 to being up $2.50, a swing of over $4.50 or well over 5%.
In this article I recommended buying a diagonal call spread which I will discuss today.
Read to the bottom of this letter to learn how you can become a Terry’s Tips Insider for absolutely no cost.
In this article I made a case that GMCR would move higher and that the Barron’s article had temporarily unfairly pushed the stock lower. In a Terry’s Tips portfolio, we purchased the spread I recommended in the article for $10.93. The natural price is now $12.15 so we have a paper profit of about 10% for the day.
I recommended making a fairly conservative options investment, buying Dec-13 well in-the-money calls at the 67.5 strike when the stock was trading about $78 and selling Aug2-13 weekly calls at the 77.5 strike. I selected the Dec-13 series because implied volatility of those options (55) was lower than any other weekly or monthly series, and since the December expiration comes well after the next earnings announcement in late October or early November, IV is not likely to plummet after Wednesday’s announcement like the August, September, and October options will probably do.
IV of the Aug2-13 weeklies is a whopping 137, just the kind of options that we like to sell.
This diagonal spread should make an average of about 25% this week if the stock stays flat or goes up by any reasonable amount, and should only lose money if the stock falls by more than 7%. This seems like a pretty good bet to me, and I have bought a large number of these spreads in my personal account.
Tags: Calendar Spreads, Calls, Credit Spreads, diagonal spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, GMCR, implied volatility, intrinsic value, Portfolio, Profit, profits, Puts, Terry's Tips, thinkorswim, Weekly Options