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Green Mountain Coffee Roasters (GMCR) Bulls Bet on Short-Term Upside

Bullish GMCR call buyers active at the March 45 strike

by 2/14/2013 8:17 AM
Stocks quoted in this article:

Bullish option traders came out of the proverbial woodwork on Wednesday, as Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR - 44.32) continued to beat a path higher. The shares are up more than 7% in 2013, and the speculative options-trading crowd is finally starting to notice.

Yesterday, the March 45 call was in the spotlight, as nearly 3,900 contracts traded, eclipsing existing open interest. More than 80% of the volume traded off the ask price, and implied volatility inched higher, all suggesting the presence of buy-to-open orders. By purchasing these near-the-money calls for a volume-weighted average price (VWAP) of $1.68, the traders are betting on a move higher from Green Mountain Coffee.

In order for these traders to be profitable when the options expire in roughly a month, Green Mountain Coffee Roasters shares need to be trading above $46.68 (the strike plus the VWAP). North of this breakeven level, gains are potentially unlimited. South of the 45 strike, meanwhile, losses are limited to the premium paid.

This bullish speculation is a change of pace for the stock, which has of late been more popular among but buyers. During the last 50 trading days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 106 puts have been bought to open for every 100 calls. The resultant 50-day put/call volume ratio of 1.06 is higher than 73% of the past year's ratio readings, suggesting bearish speculation is more prevalent than usual.

Green Mountain Coffee shares, meanwhile, have rallied more than 155% since hitting their annual low of $17.11 on July 23. During the last three months, meanwhile, the equity has outpaced the S&P 500 Index (SPX) -- in terms of relative strength -- by almost 66 percentage points.

This strong price action may be the reason some traders are scooping up calls, while short sellers are starting to look toward the exits. During the last month, short interest on Green Mountain Coffee declined by 15%, but still represents more than 20% of the stock's available float. At normal trading levels, it would take short sellers more than six days to sell out of these bearish positions. Should a short squeeze persist through the next few weeks, it could make winners out of yesterday's call buyers.


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