The Stock Option Writer
© Warren Kaplan 2011-2012
October 9, 2012
First let me say that I have an increasing position in this stock. I am a serious option writer of both Puts and Calls. I am prejudiced on the bullish side. Let me give you some background and why a huge opportunity may exist. However, if I am wrong, I will lose a lot of money, but if I am right, I will make a bundle of dough.
GMCR is the maker of the Keurig coffee system. I am a coffee drinker. Occasionally, I like tea too, especially Latte Chai. Since I am an older person, I have been advised to drink decaf products. However, in the morning, I drink a cup or two of caffeinated coffee. When I have guests, I never know if they want decaf or caffeinated coffee. Before Keurig, I made a pot of decaf coffee in my Mr. Coffee maker. I made one flavor. That was it. The coffee point was timed to shut itself off after 2-hours because after that, the coffee tasted burnt. If I wanted more coffee say 4-hours later, I heated up my cooled coffee in the microwave. And, it always had a reheated taste and smell. So, one day, I was in my chiropractor’s office and he had a small Keurig machine and I made a cup of coffee. It was really easy, quick to make and tasty and it was decaf. He had caffeinated coffee too. I liked the idea that I could pick what I wanted. I had once heard a story that the Kcup coffees were too thin. Well maybe then but not now. One day I was in Costco (another favorite stock of mine (COST) and I saw the Keurig on sale and I decided to buy it. If I didn’t like it, I knew that I could return it. I really like COSTCO. They protect the consumers. Anyway, I took my Keurig home and used it for several days and found that, for me, this was a dream come true. So, I researched the company and the stock, which is what I strongly urge you to do before buying any stock in any company.
From the Yahoo site, “Green Mountain Coffee Roasters, Inc. engages in the specialty coffee and coffee maker business. The company sources, produces, and sells approximately 200 varieties of coffee, cocoa, teas, and other beverages in K-Cup portion packs and coffee in traditional packaging, including whole bean and ground coffee selections in bags and ground coffee in fractional packs for use in at-home (AH) and away-from-home (AFH). It sells its products primarily in North America through supermarkets, club stores, and convenience stores; in restaurants and hospitality; and to office coffee distributors, as well as directly to consumers through its Website. The company also manufactures gourmet single-cup brewing systems and brewing equipment. In addition, it sells AH single-cup brewers; accessories; and coffee, tea, hot cocoa, and other beverages in K-Cup portion packs, as well as offers other licensed roasters to retailers, department stores, and mass merchandisers. Further, the company sells AFH single-cup brewers to distributors for use in offices. It provides its products under the Van Houtte, Brûlerie St. Denis, Brûlerie Mont-Royal, and Orient Express brands, as well as licensed Bigelow and Wolfgang Puck brands. The company was founded in 1981 and is based in Waterbury, Vermont.” That is Green Mountain country. They have approximately 5,900 employees and they have over 200 different flavors of Kcups. Their website is http://www.greenmountaincoffee.com.
The fiscal year ended Sept. 30, 2012 and sales are estimated at $3,200,000,000. I could go on with data but it is up to you and your broker to fill in the numbers.
The stock is a favorite among short sellers including billionaire David Einhorn. They have successfully caused doubt and selling among shareholders. I believe that the earnings for the year ended Sept. 30, 2012 were in excess of $2.25 per share and that growth continues with the normal challenges. The stock is listed in the S&P 500.
The stock closed down $1.50 on Friday. The price was $22.13. This stock and options are so active that there are weekly options. The company does not pay any dividends but the board has recently authorized a stock buy back program. Hence, the short position has grown to be a large % of the float, namely 36.4%. Most brokerage houses do not have shares to lend to shorts and many brokerage firms require 100% (no margin).
Although there is no dividend, the option premiums are extremely large. For example, the Oct 12, 2012 put at $22.00 can be sold for $.80. That is a return of 3.75% for one week. Annualized, it is 195.24%. Now, that is a return. The regular Oct 20, 2012 $22.00 put option can be sold for $1.09. That 2-week option brings you 5.19% and an annualized yield of 135.04%. Keep in mind that the stock price is extremely volatile. Hence you are being paid for insuring the price. The Nov 17, 2012 put option will bring you $2.70 (reducing your potential cost to $19.30). Your % return is 13.99% in just 6-weeks, a return of 121.24% annualized. The January 19, 2013 option brings $3.60. The return of 19.57% is an annualized return of 67.08%. Your cost is only $18.40. With so volatile a stock, I looked at selling covered calls at say $25.00. You buy the stock now at $22.13 and sell the Oct 20, 2012 $25.00 calls and receive $.26. That reduces your cost to $21.87 and you have an obligation to sell the shares at $25.00. The obligation ends in 2-weeks. If the stock rallies to say $24.50 by expiration day, you will continue to own the shares, as the option buyer is not about to exercise to buy it from you at $25.00. As for the premium, well, if the stock pops back up on Monday, you can expect the call option selling price to return to its upper levels and you might get as much as $.55 for the 2-weeks. If the stock gets called away, you will have made an additional $3.13 on your investment of $21.87, which is 14.31% and is 372.11% annualized. You could even sell call options with a much higher strike price if you are willing to look into November and especially December and still receive a hefty premium, which would lower your cost basis. In my opinion, the premiums make up for the lack of a cash dividend as well as the gut wrenching price movements. This stock is not for wimps and you need to be prepared to make or lose a lot of money.
Personally I love the product and the company and the weekly options keep me extremely active. Financial results for the year ending Sept. 30, 2012 are expected Nov 5, a day before USA elections. The mean price target for 10 analysts is $36.60 with a low of $25.00 and a high of $60.00 in 12-months. 13 analysts expect a sales growth of 14.9% in 2013. I expect more. Analyst expects earnings per share in 2013 to be $3.10.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
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