from the desk of Dr. Terry F Allen

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Posts Tagged ‘GMCR’

Check Out a Long-Term Bet on FaceBook (FB)

Wednesday, April 29th, 2015

In the family charitable trust I set up many years ago, I trade options to maximize the amounts I can give away each year.  In this portfolio, I prefer not to actively trade short-term options, but each year, I make selected bets on companies I feel good about and I expect they won’t tank in price over the long run.  Last week, I made such a bet on FaceBook (FB) that I would like to tell you about today.  The spread will make over 40% in the next 8 months even if the stock were to fall $5 over that time.Terry

Check Out a Long-Term Bet on FaceBook (FB)

When most people think about trading options, they are thinking short-term.  If they are buying calls in hopes that the stock will skyrocket, they usually by the cheapest call they can find.  These are the ones which return the greatest percentage gain if you are right and the stock manages to make a big upward move.  The cheapest calls are the shortest term ones, maybe with only a week of remaining life.  Of course, about 80% of the time, these options expire worthless and you lose your entire bet, but hopes of a windfall gain keep people playing the short-term option-buying game.

Other people (including me) prefer to sell these short-term options, using longer-term options as collateral.  Instead of buying stock and writing calls against it, longer-term options require far less capital and allow for a potentially higher return on investment if the stock stays flat or moves higher.  This kind of trading requires short-term thinking, and action, as well.  When the short-term options expire, they must be replaced by further-out short options, and if they are in the money, they must be bought back before they expire, allowing you to sell new ones in their place.

Most of the strategies we advocate at Terry’s Tips involve this kind of short-term thinking (and adjusting each week or month when options expire).  For this reason, many subscribers sign up for Auto-Trade at thinkorswim (it’s free) and have trades executed automatically for them, following one or more of our 10 actual portfolios.

Some portfolios make longer-term bets, and since they do not require active trading, they are not offered through Auto-Trade.  With these bets, you place the trade once and then just wait for time to expire.  If you are right, and the stock falls a little, stays flat, or goes up by any amount, the options you started with all expire worthless, and you end up with a nice gain without making a single extra trade.

In one of our Terry’s Tips demonstration portfolios, in January of this year, we placed long-term bets that AAPL, SPY, and GOOG would move higher during 2015, and when the January 2016 options expired, we would make a nice gain.  In fact, we knew precisely that we would make 91% on our investment for that one-year period.  At this point in time, all three of these stocks have done well and are ahead of where they need to be for us to make our 91% gain for the year.  We could close out these positions right now and take a 44% gain for the 3 months we have owned these options.  Many subscribers have done just that.

Let’s look at FaceBook and the long-term trade I just made in it.  I like the company (even though I don’t use their product).  They seem to have figured out how to monetize the extraordinary traffic they enjoy.  I looked at the chart for their 3 years of existence:

FaceBook FB Chart 2015

FaceBook FB Chart 2015

Note that while there have been times when the stock tanked temporarily, if you look at any eight-month period, there was never a stretch when it was lower at the end of 8 months than at the beginning.  Making a bet on the longer-term trend is often a much safer bet, especially when you pick a company you feel good about.

With the stock trading about $80, in my charitable trust, I made a bet that in 8 months, it would be trading at some price which was $75 or higher on the third Friday of December, 2015.  I make most of my donations in December, so like to be in cash at that time.

This is the trade I placed:

Buy to open FB Dec-15 70 puts (FB151219P70)
Sell to open FB Dec-15 75 puts (FB151219P75) for a credit of $1.52  (selling a vertical)

For every contract I sold, I collected $152 which immediately went into my account.  The puts I sold were at a higher strike than the puts I bought, so they commanded a higher price.  The broker placed a maintenance requirement on me of $5 ($500 per contract) which would be reduced by the $152 I collected.  This left me with a net investment of $348.  This would be my maximum loss if FB ended up below $70 on December 19, 2015.

A maintenance requirement is not like a margin loan.  No interest is charged.  It just means that I must leave $348 in cash in the account until the puts expire (or I close out the positions).  I can’t use this money to buy other options or stock.

If the stock ended up at $74 in December, I would have to buy back the 75 put I had sold for $1.  This would reduce my profit to $52 (less commissions of $3.75 – 3 commissions of $1.25  on the initial trades as well as the closing one).

If the stock ends up at any price above $75 (which I feel confident that it will), all my puts will expire worthless, the $348 maintenance requirement will disappear, and I get to keep the $152 (less $2.50 commission).  That works out to a 43% gain for the 8 months.

Where else can you find a return like this when the stock can fall by $5 and you still make the gain?  It is a bet that I don’t expect to lose any sleep over.

Vertical Put Credit Spreads Part 2

Monday, July 7th, 2014

Last week I reviewed the performance of the Terry’s Tips options portfolio for the first half of the year.  I should have waited a week because this week was a great one – our composite average gained another 6%, making the year-to-date record 22%, or about 3 times as great as the market (SPY) gain of about 7%.

Last week I also discussed a GOOG vertical put credit spread which is designed to gain 100% in the year if GOOG finished up 2014 at any price higher than where it started, something that it has done in 9 of its 10 years in business.  I want to congratulate those subscribers who read my numbers closely enough to recognize that I had made a mistake.  I reported that we had sold a (pre-split) 1120 – 1100 vertical put credit spread and collected $5.03 which was slightly more than the $500 per spread that I would have at risk. Actually, if the difference between the short and long sides was $20, and the maximum loss would be almost $15 (and the potential return on investment would be 33% rather than 100%).  We actually sold the spread for $10.06, not $5.03, and I mistakenly reported the post-split price.  We are now short 560 puts and long 550 puts, so the difference between the two strikes is $10 and we collected $5.03, or just about half that amount.  Bottom line, if GOOG finishes the year above $560, we will make 100% on our investment.  It closed at $585 Friday, so it can fall by $25 from here and we will still double our money.

Today we will discuss two other spreads we placed at the beginning of 2014 in one of the 10 portfolios we conduct for all to see at Terry’s Tips.


Vertical Put Credit Spreads Part 2:

We have a portfolio we call Better Odds Than Vegas.  In January, we picked three companies which we felt confident would be higher at the end of the year than they were at the beginning of the year.  If we were right, we would make 100% on our money.  We believed our odds were better than plunking the money down on red or black at the roulette table.

Late in 2013, the Wall Street Journal interviewed 13 prominent analysts and asked them what they expected the market would do in 2014.  The average projection was that it would gain slightly more than 5%.  The lowest guess was that it would fall by 2%.  We decided to make a trade that would make a nice gain if any one of the 13 analysts were correct.  In other words, if SPY did anything better than falling by 2%, our spread would make money.

In January, when SPY was trading about $184, we sold a vertical credit put spread for December, buying 177 puts and selling 182 puts.  We collected $2.00 at that time.  If the stock manages to close at any price higher than $182 on the third Friday in December, we will get to keep our entire $200 (per spread – we sold 8 spreads, collecting $1600).  The maintenance requirement would be $500 per spread less the $200 we collected, or $300 per spread ($2400, our maximum loss which would come if SPY closed below $177 in December).  Our potential profit would be about 66% on the investment, and this would come if the market was absolutely flat (or even fell a little bit) over the course of the year.  The stock closed Friday at $198.20, so it could fall by $16.20 between now and December and we would still make 66%.

The third company we bet on in this portfolio in January was Green Mountain Coffee Roasters (GMCR), now called Keurig Coffee Roasters.  This was a company with high option premiums that we have followed closely over the years (being in my home state of Vermont).  We have made some extraordinary gains with options on several occasions with GMCR.  Two directors (who were not billionaires) had bought a million dollars each of company stock, and we believed that something big might be coming their way.

With the stock trading about $75, we made an aggressive bet, both in our selection of strike prices and expiration month. Rather than giving the stock a whole year to move higher, we picked June, and gave it only 6 months to do something good.  We sold Jun-14 80 puts and bought Jun-14 70 puts, and collected $5.40.  If the stock stayed at $75, we would make only a small profit on the third Friday in June, but if it rose above $80 by that time, we would make $5.40 on an investment of $4.60, or 117%.

The good news that we anticipated came true – Coke came along and bought 10% of the company for $1 billion and signed a 10-year licensing agreement with GMCR.  The stock shot up to $120 overnight (giving Coke a $500 million windfall gain, by the way).  At that point, we picked up a little extra from the original spread.  We sold a vertical call credit spread for the June expiration month, buying the 160 calls and selling 150 calls, collecting an extra $1.45 per spread.  This did not increase our maintenance requirement because we had, in effect, legged into a short iron condor spread. It would be impossible for us to lose money on both our spreads, so the broker only charged the maintenance requirement on one of them.

Selling the call spread meant that our total gain for the six months would amount to almost 150% if GMCR ended up at any price between $80 and $150.  It ended up at about $122 and we enjoyed this entire gain.

We have since sold another GMCR vertical credit put spread for Jan-15, buying 90 puts and selling 100 puts for a credit of $3.45.  Our maximum loss is $6.55, and this would come if the stock closed below $90 on the third Friday in January.  The potential maximum gain would amount to 52% for the six months.  This amount was far less than the first spread because we selected strikes which were well below the then-current price of the stock (GMCR is now $125, well above our $100 target).  This makes our potential gain for this stock for the year a very nice 200%.

We advocate making these kinds of long-term options bet when you feel confident that a company will somehow be the same or higher than it is at the beginning. If you are right, extraordinary gains are possible. In our case, our portfolio has gained 41% for the year so far, and the three stocks can all fall by a fair amount and we will still make 100% on our starting investment when these options expire (hopefully worthless so we can keep all the cash we collected at the outset) on January 17, 2015.

An Interesting Calendar Spread Trade Idea

Monday, April 14th, 2014

Today I would like to share with you an investment I made in my personal account just today.  It involves buying three calendar spreads and waiting about a month to see if you hit the jackpot.  See if you agree with me that it is a potentially great trade.Terry

An Interesting Calendar Spread Trade Idea 

The underlying company is Keurig Green Mountain Coffee (GMCR).  I have traded options on this company almost every week for the last few years.  I like it because the options carry an exceptionally high implied volatility (IV) because the stock has been so volatile.

A few months ago, when Coke signed an exclusive license with them and agreed to buy 10% of the company, the stock shot up by about 50%.  It has since retreated from those lofty levels, recently pushed lower because several competitors have brought a suit against them because their new Keurig machine won’t accept other companies’ single cup offerings.  That sounds like a good business idea to me, not something that they could be sued over.  But our legal system never ceases to surprise me.

In any event, the stock has settled down a bit, and since the lawsuits won’t get anywhere for several months, I only care what happens in the next month.  The stock closed at $98 Friday.  I think it won’t go much lower than that, and maybe will edge higher over the next month.

I am buying June options and selling May options as a calendar spread.  I bought June 105 calls and sold May 105 calls, June 100 calls and sold May 100 calls, June 95 puts and sold May 95 puts, all as calendar spreads.  The natural price for the call spreads was $2.00 and for the puts, $1.70 (you should be able to pay a little less than the natural prices).

In one month, when the May options expire (on the 16th), if any of those three strike prices are at the money (i.e., the stock price is very near one of the strike prices), the May option will expire nearly worthless and the June option should be worth $6.35 (based on the current value of an at-the-money option with four weeks of remaining life).  That means if I could get back more than I paid for all three spreads today by selling a single spread a month from now.  Whatever I got from selling the other two spreads would be pure profit.

If the stock ends up on May 16th being $5 away from one of my 3 strike prices, based on today’s values, the spread could be sold for $4.45, or more than double what I paid for any of the spreads I bought.  If the stock is $10 away from a strike price, it could be sold for $3.05 based on today’s prices.  That is 50% more than I paid for any of the spreads.

However, the company announces earnings on May 7th.  Because of the uncertainty surrounding that event, option prices are much higher now than they will be after the announcement.  IV for the June options is 55 right now, and it is only 44 for weekly options that expire before the announcement.  If we assume that IV for the June options will fall by 11 after the announcement, this is what the risk profile graph looks like:

GMCR Risk Profile Graph April 2014

GMCR Risk Profile Graph April 2014

This graph has numbers for 5 calendar spreads at each of the 3 strikes, with a total investment of about $4800.  If the stock ends up flat or up to $7 higher than it is right now, there would be about a 60% gain from the spreads.  If it falls by $10 (an unlikely event, in my opinion), a loss of about $400 would result.  Although the graph does not show it, the upside break-even is $15 higher than the current price.  It shows that above $113, losses would result.

Many stocks move higher in the few days before an announcement in anticipation of good results, a good reason I like to have a little more coverage on the upside (if you are more bullish, you would buy more spreads at higher strike prices, and if your were bearish on the company or the market, you would buy more spreads at lower strike prices).

One nice thing about calendar spreads is that the options you buy have a longer life span than those you are selling, so their value will always be higher, no matter how far from the stock price they might be.  You can never lose all of your money with a calendar spread, unlike who might happen in a vertical spread or short iron condor, two popular option spreads.

If the stock moves dramatically either way between now and announcement day, I would add another calendar in the direction the stock has moved (at the 115 strike if it moves higher, or the 90 strike if it moves lower).  That move would give me a wider break-even range than presently exists.

I will report back to you on how these spreads turn out in four weeks.


An Interesting Calendar Spread Play

Wednesday, February 5th, 2014

Today after the close, one of my favorite stocks, Green Mountain Coffee Roasters (GMRC) , announces earnings.  I am taking quite a chance telling you about another option spread investment that I made this week because if the stock tanks after today’s announcement, I won’t be looking so good.The idea I am suggesting can be used for any stock you might have an opinion about, and it could easily double your money in about six weeks if you are approximately right about where the stock might be at that time.


An Interesting Calendar Spread Play

As you probably know, I love calendar spreads.  These spreads involve buying a longer-out option and selling a shorter-length option at the same strike price.  You only have to come up with the difference between the two option prices when you place the order.

When the short options expire, if the stock is very close to the strike price of your spread, you can expect to sell the spread for a great deal more than you paid for it.The further away from the strike price the stock is when the short options expire, the less valuable the original spread will be.

The trick is guessing where the stock might end up when the short options expire. This takes a little luck since no one really knows what any stock is likely to do in the short run.  But if it’s a stock you have followed closely, you might have an idea of where it is headed.

I happen to like GMCR.  I like knowing that insiders have bought millions of dollars worth of stock in the past few months and 30% of the stock has been sold short (a short squeeze could push the stock way up).  So I am guessing that the stock will be closer to $85 in six weeks compared to $80 where it closed yesterday (as I write this Wednesday morning it has moved up to about $81.50).

I bought a calendar spread on GMCR at the 85 strike, buying Apr-14 calls and selling Mar-14 calls.  I paid $.85 ($85) per spread for 10 spreads, shelling out $850 plus $25 in commissions.  Here is the risk profile graph for March 22 when the short options expire:

GMCR calendar risk profile graph feb 2014

GMCR calendar risk profile graph feb 2014

The graph shows that the stock can fall by as much as $5 and I will make a gain, or it can go up by more than $10 and I should expect a gain.  This seems to be a pretty large break-even range to me.  If I am lucky enough to see the stock end up near my $85 target, it is possible to triple my money in six weeks.

One nice thing about calendar spreads is that you can’t lose all of your investment.   No matter where the stock goes, the value of the April options will always be greater than the price of the March options at the same strike price.  When you are only risking $85 per spread, you can be quite wrong about where the stock ends up and still expect to make a gain.


Barron’s Article Creates Great Buying Opportunity For Green Mountain Coffee Roasters

Monday, August 5th, 2013

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.


Barron’s Article Creates Great Buying Opportunity For Green Mountain Coffee Roasters

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.

Two Earnings Play for This Week – Deere and Sina

Monday, May 13th, 2013

 The Green Mountain Coffee Roasters (GMCR) spread I recommended last week resulted in a 20% gain.  Not bad considering we were blindsided by their announcing a new 5-year deal with Starbucks that shot the stock 25% higher while we were betting on a lower post-announcement price.  Our gain was not as great as last week’s 50% gain on Apple, but we will take 20% anytime (I’m sorry, but I executed the Apple spreads in a Terry’s Tips portfolio and did not share it with the free newsletter subscribers).




This week I have two earnings-related plays which need to be made before the close on Wednesday if you want to participate.




If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!








Two Earnings Play for This Week – Deere and Sina




Sina Corporation (SINA) is pretty much the same as Yahoo but operates in China.  I have written a Seeking Alpha article about the company – How To Play The Sina Corporation Earnings Ann… in which I explain why I believe that the stock will probably dip a bit after Wednesday’s announcement (largely because expectations are high, the current valuation is pricey, and hedge funds are selling shares).




I recommended these trades to play the SINA announcement with the stock at about $59:




BTO 10 SINA Jun-13 55 puts (SINA130622P55)


STO 10 SINA May-13 55 puts (SINA130518P55) for a debit of $1.01  (buying a calendar)




BTO 10 SINA Jun-13 57.5 puts (SINA130622P57.5)


STO 10 SINA May-13 57.5 puts (SINA130518P57.5) for a debit of $1.11  (buying a calendar)




BTO 10 SINA Jun-13 60 calls (SINA130622C60)


STO 10 SINA May-13 60 calls (SINA130518C60) for a debit of $1.18  (buying a calendar)




These trades should make a gain if the stock goes up by less than 5% or down by less than 10% by Friday at the close.




The other earnings play involves Deere & Co. (DE) which has the unenviable record of falling four straight quarters after announcing, even when they bested expectations.  I have also written a Seeking Alpha article on this play – How To Play the Deere & Company Earnings Announcement.




Expectations are high here, too, and I expect a lower price than the current $93 after earnings.  Here are the spreads I am making in Deere:




Buy To Open 10 DE Jun-13 95 puts (DE130622P95)


Sell To Open 10 DE May-13 92.5 puts (DE130518P92.5) for a debit of $2.35  (buying a diagonal)




Buy to Open 5 DE Jun-13 90 puts (DE130622P90)


Sell to Open 5 DE May-13 90 puts (DE130518P90) for a debit of $.90  (buying a calendar)




These spreads will do well if the stock falls but start to lose money if the stock moves more than $2 higher.




Please check both Seeking Alpha articles for my complete reasoning for these spreads as well as a risk profile graph for each.


Update on the Green Mountain Coffee Roasters (GMCR) Trade

Thursday, May 9th, 2013

Update on the Green Mountain Coffee Roasters (GMCR) Trade


On Monday, I wrote to my free newsletter subscribers and recommended the following trade in advance of the company’s earnings announcement after the close on Wednesday:


Buy To Open 10 GMCR Jun-13 52.5 calls (GMCR130622C52.5)

Sell To Open 10 GMCR May2-13 57 calls (GMCR130510C57) for a debit of $3.70 (buying a diagonal) 


This spread would make a gain for the week if the stock managed to fall by less than 10%, stay flat, or go up by any amount.  The maximum gain would come if the stock fell by about $2 (to $57) after the announcement.


I also wrote a Seeking Alpha article explaining why I believed that the company would exceed expectations but the stock would fall slightly after the announcement for a couple or reasons (primarily because expectations were so high) – How To Play The Green Mountain Coffee Roaster…


My analysis on the earnings announcement was right on the money, but the company also disclosed that they had signed a 5-year deal with Starbucks (SBUX) that caused the stock to shoot higher by about 25%.  In my defense, there was no way I could have known about this wonderful news for GMCR stockholders.


I was able to sell the spread for only its intrinsic value ($4.50) because the stock had moved so much higher.  That resulted in a gain of 20% after commissions for the trade.


In most investments, a 20% gain in three days would be considered a fantastic return.  Actually, I was a little disappointed. I could have made double that amount if the
Starbucks news had come along at some other time than today.


Over a million dollars was invested in the GMCR Jun-13 52.5 calls on Monday after I made my recommendations, double or triple near-by option volume.  Clearly, lots of people heeded my advice.  I hope they are satisfied with a 20% return for the week.  I guess I am, reluctantly.

How to Play the Green Mountain Coffee Roasters Earnings Announcement

Monday, May 6th, 2013

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:


  1. The company has matured under its new CEO (from Coca-Cola).
  2. Raw coffee prices have fallen steadily and single-cup prices have not been reduced.
  3. 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.

Options Strategy for the Green Mountain Coffee Roasters Earnings

Tuesday, February 5th, 2013



After the market close tomorrow, Green Mountain Coffee Roasters (GMCR) will announce quarterly and year-end earnings.  I am quite bullish on the stock, and have written a Seeking Alpha article explaining why – Why Green Mountain Coffee Roasters Will Soar This Week 

(I apologize for its being so long, but as Abraham Lincoln once said in a letter he wrote to a friend, I didn’t have enough time to make it shorter.)

Options Strategy for the Green Mountain Coffee Roasters Earnings

If you I have a strong feeling for a particular stock prior to their making an earnings announcement, there are a couple of strategies I like to employ.  I would like to tell you about one of them today.  It involves a little hedge just in case I am wrong (with this hedge, I won’t lose all my money). 


An aggressive strategy if you were very bullish on a stock would be to sell an at-the-money put in the shortest-term option series available (for GMCR, (that would be the Feb2-13 options expiring on Friday February 8, two days after the Wednesday after-close announcement).  Option prices in this series tend to escalate to about double or triple their usual implied volatility, making them very “expensive”.  Since you don’t want to sell any option all by itself (they call that naked selling because that’s how you feel whenever you do it, totally exposed), you must buy some other  put to cover yourself (and avoid a horrendous margin requirement from your broker).  If you bought lower-strike Feb2-13 puts, you would collect a credit on your spread sale (called a vertical put spread), and there would be a maintenance requirement of $100 for each dollar of difference  between the strike prices. 


For example, with GMCR selling about $48, you could buy a Feb2-13 43 put and sell a Feb2-13 48 put and collect about $2.  There would be a maintenance requirement of $500 less the $200 you collected from the vertical spread sale.  Your maximum loss is $300 and this would come about if the stock fell to below $43 from the $48 where it was before the announcement. 


With this spread, you are hoping that the stock closes on Friday at any price above $48.  If it does, both your long and short puts will expire worthless and you save paying commissions on closing out the positions.  You just end up with $200 (per spread, less commissions) in your account and the maintenance requirement goes away.  You would have made about 65% after commissions on your $300 at risk. 


What I do (the hedge) is a little different.  Instead of buying the lower-strike put in the same series, I go out to a longer period series.  I might buy a Feb-13 43 put (which expires February 15, a week later) instead of the Feb2-13 43 put.  It would only cost me about $.30 more (i.e., I would collect about $1.75 instead of $2.00 at the beginning), but if I wrong about GMCR and the stock falls instead of moving higher, this put might have a decent value when the Feb2-13 45 put expires in the money.  If the stock is below $48 at expiration, I will buy it back on Friday and sell my Feb-13 43 put at the same time.   


If the stock falls over $3, I will probably lose money on the original spread, but I will gain some of the loss back from selling the Feb-13 43 put.  It is not a perfect hedge, but it reduces the maximum loss from $300. 


I have placed this exact spread in my personal account – it is called buying a diagonal put spread.  I received $1.75 and hope to collect that much per spread on Friday (plus whatever I can collect from selling the Feb-13 43 put that that has a week of remaining life.



An Interesting Options Play for Green Mountain Coffee Roasters

Monday, October 22nd, 2012

If you like a stock, there is a much better way to make money on it other than buying shares.  The answer is to use options, of course.  Today I would like to share one simple trade you can make as an alternative to owning the stock.  It should gain over 50% in two months even if the stock does not go up by a penny.  If the stock falls by 10% over that period, you should make about 20%.  Meanwhile, people who bought the stock would have absolutely nothing to show for their investment (except maybe a loss).

Why would you ever buy a share of stock when options could deliver these kinds of returns?

An Interesting Options Play for Green Mountain Coffee Roasters

Green Mountain Coffee Roasters (GMCR) has had a rocky year, but for the last few months it seems to have stabilized and might be worth a second look (especially if you could make 20% or more on it with options in just two months as I propose here).  First, check out a recent Seeking Alpha article Green Mountain: Stock Is A Good Brew.  It might give you a little confidence in the stock.
In the interests of presenting both sides, check out the downside case, also at Seeking Alpha – Stay Away From Green Mountain Coffee.  However, even this critic advises against shorting the stock. 

GMCR is selling at 9x or 10x earnings and doesn’t appear likely to have a big sell-off in the near future.  One option investor recently made a huge options bet that the stock will move higher – see Bulls Smell the Coffee at Green Mountain.  These options could return $5 million to the buyer if the stock is above $30 when the November options expire on the 17th.

The option strategy I suggest should make about 20% in two months even if GMCR falls by 10% over that time period.

I have watched this company for many years.  It is located in my home state of Vermont.  I used to play tennis with its founder, Bob Stiller, every week.  (I don’t want to brag, but I remember that I won about 90% of the matches – he seemed to be more interested in growing his company than staying in tennis shape.)   Just today, Bob donated $10 million to Champlain College, a local business school that has also been one of my favorite charities (and where I was a trustee for 11 years).

Here is what the risk profile graph looks like for the stock (currently trading at just under $24).  These positions cost about $2700 to put on:


The graph shows that a nice profit averaging over 30% can be made in two months at any ending price on December 21st which is higher than $22, and a profit of some sort at any price higher than $20.50.  This downside break-even point would mean that the stock fell by 14% from its current level.

Here are the actual positions that create the above risk profile graph:


I used 10 diagonal call spreads, buying January 2013 calls and selling December 23 calls for about $2.70 ($270 per spread).  This simple trade is far superior to owning the stock as far as I am concerned.  If the stock falls 10%, you still make about 20% on your investment.  If the stock stays exactly where it is on January 18th you should earn almost 60% on your money.

Why would anyone buy the stock when they could place a simple spread like this and make money even if the stock goes nowhere or even falls by as much as 10%?  It just doesn’t make sense to me.


Any questions?   I would love to hear from you by email (, or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here.   Why wait any longer to make this important investment in yourself?

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