How to Buy GMCR at a -23% Discount.. or Get Paid Not To
Green Mountain Coffee Roasters’ (NASDAQ: GMCR) shares dropped from atmospheric heights of over $100 per share to under $20 during the past year. The stock’s potential downside has been dramatically reduced; however, trying to catch a falling knife is still dangerous.
Because of the incredible volatility (another word for “opportunity”), GMCR options offer many strategies with mathematical advantages over a straight purchase of the shares. For those traders who are comfortable holding on to an inexpensive stock to wait for a potential recovery, the best one to employ here would be a cash-secured put.
This option strategy allows you to get into GMCR at a more than 20% discount… or get paid not to.
Cash-Secured Put Strategy
While the typical investor may use a straightforward limit order to buy a stock at a designated price or lower, the options trader can do one better by selling a cash-secured put.
This strategy has the same mathematical risk profile as a covered call. With the put sale, there is an obligation to buy the stock at the strike price if it is assigned, allowing you to get into the stock at a discount. In fact, the true entry cost basis is even lower with the subtraction of the premium you earned when selling the put.
And if the stock is not below the strike price at expiration, then the premium received is all profit. In other words, you’re getting paid not to own the stock.
Get Your Green Mountain Coffee Roasters Fix for Less
Green Mountain Coffee Roasters is best known for its Keurig single-serve coffee maker and assortment of K-Cups. After a very tough year for the stock, prices have dropped to levels not seen since 2009. As of this writing, GMCR is trading around $18, just above the recent extreme lows at the $17.75 area.
Coffee commodity prices are half of what they were at the peak last year, while retail prices paid by the consumer remain high. So if you’re of the mindset that Green Mountain can brew up a hot pot of revenue that will give the stock a jolt, then try this cash-secured put trade.
Recommended Trade Setup: Sell to open GMCR Aug 15 Puts at $1 or better.
The cash-secured put sale would assign long shares at $14 ($15 strike minus $1 premium), which is about 23% lower than GMCR’s current price, and would cost you $1,400 per contract.
If you don’t get assigned the stock, you can simply pocket your premium and move on to the next opportunity. But if you do end up owning GMCR, you may want to consider selling a September covered call against the stock to lower your cost basis even further.
There are two rules that cash-secured put traders should follow in order to be successful:
Rule One: Only sell puts on stocks you want to own.
The intention of this strategy is to be assigned the stock as a long-term investment (each option contract represents 100 shares). So make sure you have the funds in your account to buy the stock.
Rule Two: Sell either of the front two option expiration months to take advantage of time decay.
Collect premium every month on put sales until you are assigned shares at a cost-reduced basis. Every month that you keep the premium is money subtracted from your entry price.