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Green Mountain Bears Bet Big on a Move Lower

GMCR's January 2013 19-strike put is popular today

by 11/14/2012 2:19 PM
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Calls have emerged as the options of choice on Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR - 24.33) in recent weeks, as evidenced by data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 10 sessions, traders have bought to open 134 calls for every 100 puts. This call/put volume ratio of 1.34 ranks higher than 62% of other such readings taken in the past year, indicating bullish bets have been bought to open over bearish at an accelerated clip of late.

This call-skewed trend is echoed in GMCR's Schaeffer's put/call open interest ratio (SOIR) of 0.80. Not only does this show call open interest outweighs put open interest among options expiring over the next three months, but it also ranks in the 16th percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward the stock.

With the coffee concern's earnings looming on the horizon, and the company's mixed history in the confessional, it appears some option traders are changing their tune ahead of this event. In yesterday's session, traders at the ISE, CBOE, and PHLX bought to open 1,999 puts, compared to 323 calls, bringing the equity's single-day put/call volume ratio to 6.19.

Additionally, puts have the slight edge on calls in today's session. Around 8,400 put contracts have crossed the tape at last check, versus fewer than 6,800 call contracts. Traders are honing in on the out-of-the-money January 2013 19-strike put, which has seen nearly 2,100 contracts change hands. Nearly all of these have crossed at the ask price, implied volatility is 2.7 percentage points higher, and just 928 contracts currently make up open interest at this strike. Putting it all together, it seems new positions are being initiated here today.

By buying these puts to open, speculators will begin to profit once GMCR breaches the breakeven level of $17.86 (the strike minus the volume-weighted average price of $1.14) through Jan. 18, when these options expire. This represents a 27% slide from the equity's current price, and territory the stock has not seen on a daily closing basis since July 24. Also, as of yesterday, the delta of this position was sitting at -19%, implying a 19% chance this put will finish January expiration in the money.

On the charts, GMCR's technical backdrop leaves little to be desired, with the stock losing more than 48% of its value over the last 52 weeks. The equity has shown some signs of life over the past month, and has outperformed the broader S&P 500 Index (SPX) by nearly 17 percentage points during the last 20 sessions. However, GMCR's recent momentum has stalled near its 32-week moving average, a trendline that has ushered the security lower since October 2011.

As touched upon earlier, though, GMCR is scheduled to unveil its quarterly earnings report ahead of the bell on Tuesday, Nov. 27. The company has bested analysts' bottom-line expectations in each of the last four quarters, and Wall Street is calling for a per-share profit of 48 cents in GMCR's fourth quarter.

One final note, while the breakeven level on the aforementioned January 2013 19-strike put seems like a steep drop from current levels, the stock has been prone to big fundamentally driven price moves. In fact, the equity plunged nearly 50% in May following its second-quarter results, and, conversely, surged 30.8% in September after the launch of its "Wellness Brewed" beverages for its Keurig coffee machine.

At last check, the stock had given back 0.7% in today's session to hover near $24.33.


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