On the heels of this news, one brokerage downgraded the shares to “neutral” from “buy” and Jim Cramer told “Mad Money” viewers to stay away from the stock, quipping “Once a momentum stock is broken it tends to stay broken … and [GMCR] looks real broken.” In other words, the stock’s trend is not Mr. Cramer’s friend.
Investors who agree with this change of heart in GMCR but do not want to short the shares might be curious about options strategies. Here are two strategies, one neutral and one bearish. Remember, these are not buy-sell-hold recommendations and be cognizant of your personal risk/reward parameters before entering any new trades.
*Prices given as of Friday afternoon
Bearish Option Strategy: Put Butterfly
Investors who agree with Cramer’s negative outlook on Green Mountain, could buy a put butterfly, which is potentially less risky than shorting the underlying shares. The September 60/70/90 put butterfly could be purchased for an overall net debit of $9.70 by:
- Buying one September 90 put
- Selling two September 70 puts
- Buying one September 60 put
If GMCR is trading right at 70 at September options expiration, the investor collects the maximum potential profit of $10.30. The maximum loss, meanwhile, is 100% of the debit paid ($9.70) and occurs if GMCR is trading at 90 or above at expiration.
Because this butterfly spread is of a “broken-wing” nature (the distance between the strikes is not the same on either end of the short put), there is only one breakeven price, and it is $80.30. If GMCR is trading anywhere below this level when the options expire, the trade will be profitable. Below 60, gains are limited to $0.30 (the maximum profit minus the difference between the 70 and 60 strikes).
Neutral Option Strategy: Iron Condor
For those who think GMCR skepticism might be overblown (but don’t anticipate much upside either) could consider a trusty iron condor. This four-legged strategy, which banks on the stock staying in a range between 70 and 75 through the next few weeks, could be executed by trading the following:
• Short the June 70/60 put spread (by selling the 70 put and buying the 60 put)
• Short the June 75/85 call spread (by selling the 75 call and buying the 85 call)
The net credit for this trade is $5.20, which is the maximum potential profit for this condor, achieved at expiration if GMCR is sitting between the short strikes (70 and 75). The upper and lower breakevens, respectively, are $80.20 and $64.80; anywhere between these levels, the condor is profitable at expiration. The maximum potential loss is limited to $4.80, which occurs if GMCR drops below 60 or moves above 85.
What’s Your Take?
Is GMCR going to bounce back or is its downtrend here to stay for a while? How would you play GMCR in your portfolio?
Compare OptionsHouse commissions for stocks and options with other brokers. For investors who are new to options trading and want to try out their trades without committing real money, practice using a free virtual trading account.
Photo Credit: Jose Oquendo
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