The Stock Option Writer
© Warren Kaplan 2011-2012
May 9, 2012
The subject of an enormous and powerful bear raid and a management not skilled in handling this kind of situation has set up what I believe is a possible huge opportunity to make a lot of money.
For the second quarter that ended March 31, the company reported a per share profit gain of 42% and a revenue gain of 37%. The revenue gain was well below unrealistic forecasts by Analysts. For 2012, the company is forecasting earnings of $2.40-$2.50 per share. The previous estimate was $2.65. Earnings for the year ending Sept. 30, 2011 were $1.14 per share. According to TREFIS research, the stock has a value of at least $44. I would say the biggest weakness is in current management’s inability to forecast correctly, which I would expect will bring lawsuits for damaging shareholders.
However, the stock price, which has a last 12-month high of $115.98 closed at a new 12-month low tonight of $24.30. (May 7, 2012).
If you believe in the future of Green Mountain Coffee Roasters, you can take the risk of selling the Sept. $25 puts and receive $5.10. Your cost of the shares would be $19.90 and if the stock recovers and passes $25 on Sept. 22, 2012, you will have had a return of 25.63%. The annualized return would be 73.22%. Huge return for large risks. Don’t forget that this current management has missed estimates before so the $2.50 earnings per share are not in the bag.
The company makes the famous single cup Keurig brewer and feels it has a user base of 10.8-12.2 million machines. These machines use the famous K-cups, which is a repeat business for GMCR. The company has recently introduced a new single cup coffee brewer that is a vast improvement. The new machine is called Vue. The cups are different from the Kcups and the brew is stronger and can be much larger.
A safer approach would be to write the Sept. 2012 $20 put and receive a premium of $2.56, thereby reducing your cost to $17.44. The gives you a potential profit of 14.68%, which is an annualized 42.14%.
Options are available in 1-point separations so you can write a put at $16.00 for Sept. 2012 and receive a premium of $1.20. That gives you an effective cost of $14.80 and a yield of 8.11%, annualized yield is 23.28%.
The common stock does NOT pay a dividend so I see no point in going long the shares. Your brokerage house should be paying you interest on your cash balances.
One thing to keep in mind is that the 3rd quarter report from Green Mountain is due around August 2nd. That report can decide the fate of the common stock. If the company does not reach or exceed the latest estimates, the stock could get plummeted. To prevent a possible large loss, you can buy the put below the one you sell. So, if you sold the Sept. $25 put, you should consider buying the Sept. 24 put. That limits your maximum loss to $100 per contract and a possible gain of $55 per contract. That is a gain of 55% if the stock closes above $25 on Sept. 22, 2012. In this particular case, the caution is really wanted. The annualized yield is 157.89% if the trade works. Remember that you only have to put up $100 for one contract.
If you want to take a high risk, you can buy the stock for say $24.30 and sell the Sept. 22, 2012 call at $30 and receive $2.75 now. That reduces your cost to $21.55. If the Sept. 2012 price is anywhere under $30, you will keep the stock and then you can write a new call option. If the stock gets called away because it is over $30, your gain would be $8.45 and you will have made 39.21%, annualized 112.57%.
You really need a strong stomach for you to get involved in this stock. Both bulls and bears are passionate about their position. That is why the premiums are so high. Personally, I use the Keurig brewer and I love it. I am in the bull camp, especially at the current level.
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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