Green Mountain Coffee Roasters' (Nasdaq: GMCR)
shares have dropped from atmospheric heights over $100 in 2011 to
finally stabilize at the $20 level, which the stock has not seen
since 2009.
As of this writing, Green Mountain is trading around $24. The
$20 level is a pivot support area to lean on with extreme lows at
the $17 area.
Because of the high volatility, another word for opportunity,
the options on the stockoffer many strategies with mathematical
advantages over a straight purchase of the shares. One tactic in
particular could allow us to collect income while we wait to get
into the stock at an even bigger discount.
Cash-Secured Put Strategy
While the typical investor might use alimit order to buy a stock
orETF 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 acovered
call . With the put sale, there is anobligation to buy the stock at
thestrike price if it is assigned, allowing you to get into the
stock at a discount. In fact, the true entrycost basis is even
lower with the subtraction of the premium you earned by selling the
put.
And if the stock is not below thestrike price atexpiration ,
then the premium received is allprofit . In other words, you're
getting paid not to own the stock.
There are two rules that cash-secured put traders must follow 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-terminvestment (eachoption contract represents 100 shares). So
make sure you have the funds in your account to buy the stock at
the options strike price if a sell-off continues. Paying in full
ensures that no additional money is needed to hold the stock for
potentially many months or even years until a price recovery.
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.
Action to Take -->
Sell to open Green Mountain Dec 20 Puts at $1 or better.
This cash-secured put sale would assign long shares at $19 ($20
strike minus $1 premium), which is 22% lower than Green Mountain's
current price, and would cost you $2,000 per contract. Remember:
Only sell this put if you want to own Green Mountain shares at a
discount to the current price. If you are assigned the shares, a
January covered call can be sold against the stock to lower your
cost basis even further.
And if the stock does not fall below the strike price before
expiration, you keep the premium you collected, essentially getting
paid not to buy the stock.