The spreads I suggested buying a week ago in advance of the Questor (QCOR) earnings announcement resulted in a gain of 13.6% for the week. We were correct in the direction the stock would take (higher) but we underestimated how much it would rise. We lost money on the calendar spread but made it back and more in the vertical spread we placed at the same time.
While we were disappointed with our return, 13.6% per week on an annualized basis works out to a pretty big number.
This week I am sharing what I believe is one of the best option investment possibilities I have seen in a very long time.
If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!
How to Play the Green Mountain Coffee Roasters Earnings Announcement
For the three following reasons, I believe that Green Mountain Coffee Roasters (GMCR) will exceed expectations when they announce earnings after the close on May 8, 2013:
- The company has matured under its new CEO (from Coca-Cola).
- Raw coffee prices have fallen steadily and single-cup prices have not been reduced.
- Hedge funds have started buying stock heavily.
Since there is often a big difference between how good earnings might be and what happens to the stock price, there seems to be conflicting indications on what the price of GMCR might be at the end of the week. Most importantly, expectations seem to be sky-high. Whisper numbers are 8.3% higher than analysts expect, and the stock has steadily climbed by 30% over the last quarter. Many times, unless there are blow-out earnings such as we saw in Netflix a couple of weeks ago, the stock trades lower.
On the other hand, short interest (39% of the float) continues to be exceptionally high (bringing the possibility of a short squeeze). If earnings do manage to exceed expectations as I think they will, there might be a lot of short covering that will boost up the stock price.
Bottom line, I think the most likely scenario is that earnings will be good and the stock dips a bit. With this in mind, here is the spread I placed this morning in three Terry’s Trades portfolios as well as my personal account:
Buy To Open GMCR Jun-13 52.5 calls (GMCR130622C52.5)
Sell To Open GMCR May2-13 57 calls (GMCR130510C57) for a debit of $3.70 (buying a diagonal)
This spread should make a gain if the stock falls by less than 10% after the earnings announcement, stays flat, or goes up by any amount. If the stock fluctuates only slightly, a gain as large as 50% might result.
Later today, Seeking Alpha will probably publish an article giving fuller details of my reasoning outlined above. The title will be How to Play the Green Mountain Coffee Roasters Earnings Announcement. If they don’t publish it (presumably because it is too much a pure options play), I will send you the full article later today.
I feel very good about this spread.
Tags: Calls, diagonal spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, GMCR, implied volatility, Portfolio, Profit, profits, Puts, Terry's Tips, thinkorswim, Volatility, Weekly Options