Earlier this week, my colleague Chris Preston alerted you to super-low prices in what is known as “soft” commodities – things like corn, sugar, and cotton.
Chris left out one commodity – and it’s one that is very important to me personally. I’m talking about coffee.
I wanted to focus today’s issue on one compelling coffee investment opportunity that both hits close to home (for me – here in Vermont) and one that I think could be safe and profitable for you.
It’s a little complicated at first blush – but I’ve asked another one of my colleagues, Andy Crowder, to help me construct an options trade to take advantage of what I perceive to be an excellent low point for one of the world’s greatest coffee investments: Green Mount Coffee Inc (Nasdaq: GMCR).
I live less than 1 mile from Green Mountain Coffee in Waterbury, VT and I regularly wake up to the aroma of roasting coffee. And you may recall that Green Mountain Coffee was the subject of a massive short-sell call from master short-seller David Einhorn late last year.
The stock has tumbled dramatically since then, but I think it’s rounding out its lows for now. In essence, Andy has created a trade that offers the chance for 15% gains in about a week – with an 82% likelihood of success.
Before I ask Andy to explain the nitty gritty details of how to execute this trade – I’d like to show you a 15 month chart of Green Mountain Coffee – and I’ll direct you to pay attention to the red line at the $39 mark.
In essence, the trade Andy describes below will be successful as long as Green Mountain stays above $39 a share between now and May 2, 2012. For the stock to dip below $39 that would require a more than 20% loss in one week – something that’s not likely to happen. In fact, as I mentioned, Andy calculates an 82% chance that GMCR will remain above $39 between today and May 2nd.
Okay…now for the tricky part. If you’ve never traded options – then this next section might not be for you. Instead, I’d recommend putting in a stink bid on GMCR at $40.
But if you’re options savvy – take a look at Andy’s trade:
Sell to open GMCR May 12(7) 39 puts
Buy to open GMCR May 12(7) 37 puts for of $0.40
One thing to notice is that the natural price (bid price of 39 strike – ask price of 37 strike) equates to $.30. Typically, when we see a bid-ask spread of $0.10 on both options we can work the order. This means rather than placing a price at the natural for $0.30 we should work the order for slightly greater, say $0.35.
For many of you this might be quite a bit of information to take in at once. It’s okay; no one said this was easy. But once you are equipped with this information and are familiar with how to use it to your advantage, the world of options investing opens itself.
If you’re interested in looking at some more of Andy’s trades (not all of them involve commodities) you should consider signing up for his free live chat event that he’ll be hosting next Thursday at 1 pm EST.
Andy is one of the best analysts working in the options field today, and he’s putting together a very compelling chat about how he uses options as a form of stock market insurance. Click here to secure your spot.