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Green Mountain Coffee Roasters Inc. (GMCR) Bear Sees Bleak Road Ahead

And his outlook on GMCR is shared by many in today's options pits

by 7/1/2013 2:24 PM
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Volume on Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is running at about two times its typical intraday average, and it's being powered by transactions on the put side of the equation. Specifically, about 38,000 puts have traded so far, which is four times the expected amount.

Digging deeper, in spite of the fact that GMCR is up 3.6% on the session to trade at $77.94, a group of speculators is betting on long-term downside for the coffee name. Specifically, over 5,000 January 2014 60-strike puts have changed hands, powered by a single block trade of 4,895 contracts that crossed at the ask price of $5.35. With volume outpacing open interest at the strike, it appears that this bear has opened a new position.

In order for the investor to profit on the trade, the shares of Green Mountain must descend to $54.65 (strike price minus premium paid) by options expiration. That represents a loss of just under 30%, with gains to be had for each successive step south the underlying takes. But if the severe pullback doesn't materialize, the most the block trader can lose is the premium paid.

Of course, considering GMCR's long-term ascent, it's possible that the put buyer is also a shareholder. By purchasing protective puts, the investor can lock in an acceptable exit price for the GMCR shares ($60), should the stock take a turn for the worse in the second half of the year.

In any case, pessimism has been plaguing GMCR of late. The stock's 50-day put/call volume ratio is 1.20 over at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Statistically, the ratio places in the 90th percentile of its annual range, meaning puts have been bought to open at an unusually rapid pace, relative to calls, in the last 10 weeks.

Outside of the options pits, short interest has swollen, and now accounts for nearly 22% of the stock's outstanding float. In the event of a short squeeze, it would take investors nearly two weeks to buy back their shorted shares, at the java giant's average daily trading volume.

The sentiment surrounding Green Mountain Coffee Roasts Inc. (NASDAQ:GMCR) is obviously not predicated on its technical performance. On a relative-strength basis, the stock has dominated the broader S&P 500 Index (SPX) by a margin of nearly 37 percentage points over the past three months. Moreover, although GMCR has pulled back a bit since notching an all-time high of $82.95 last month, it still boasts support from its ascending 40-day moving average.

Should history continue to repeat itself over the next six months, an unraveling of the various bearish positions could provide a contrarian boon to the shares.


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