EOT trade alert March 25, 2014

| March 25, 2014

March 25, 2014

Trade Alert:

Buy GMCR May 2014 $90 Puts at $3.10 or better

Company Background:

Keurig Green Mountain (GMCR) is a specialty coffee and coffeemaker business.  They specialize in at home individual coffee servings and are brewers.

Short-Term Catalyst:

GMCR has been on a wild ride over the last few months.  The stock price jumped from around $80 to as high as $124 before falling back to around $107 today.

The catalyst for the 55% jump from $80 to $124 was the finalization of a partnership between GMCR and The Coca-Cola Company (KO).

KO took a 10% stake in GMCR for $1.25 billion.  Under the agreement, GMCR will have the exclusive rights to make Coca-Cola products for use in its Keurig Cold at-home beverage system.

Here’s the thing…

You can’t even buy Keurig’s cold beverage system yet.  And even if GMCR’s system is adopted at the same rate as SodaStream’s (SODA), the impact doesn’t justify the $4.9 billion jump in market cap that we’ve seen over the last few months.

What’s more, GMCR’s coffee business is under assault from competition.  They gave horrible guidance at their last quarterly earnings.  And the Coca-Cola deal isn’t going to change that.

One of the main reasons GMCR skyrocketed after the deal with KO was announced was because of short covering.  Short interest in the stock dropped from 32.9 million shares to 13.6 million shares.

Right now, GMCR is overvalued, their coffee business is stagnating, and the KO deal is still years away from helping the company.  As the hype from the KO deal wears off, I’m expecting a dose of reality to send this stock back to the pre Coca-Cola deal levels.

Let’s grab put options on GMCR now to profit from the coming drop.

Trade Details:

Underlying Stock Symbol: GMCR
Current Bid-Ask Price: $2.64 – $3.05
Option “Buy Up To” Price: $3.10
Break-Even On Stock At Expiration: $86.90
Maximum Risk Per Contract: $310


Exit Strategy:

GMCR is trading at $107.65 per share.  Resistance levels will be at $110.00 and again at $115.00.  Remember, we want this stock to move lower.  Support levels will be at $90.00 and $80.00.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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