Green Mountain (GMCR) Falls Under $30

September 30, 2010, 10:36 pm

October has gotten off to a good start as the bulls have used this morning’s positive economic data to once again push the market near its resistant levels. The gains in September were impressive but here is one thing to keep in mind as we head into October.

We mentioned the fantastic September numbers for the major averages this morning but August was a horrible month for the market as the Dow fell 5%. In July, the index was up 7% and in June, down 4%. For May, the index tanked 8%.

October should produce a move of 5%-10% given the overall trend but we are right at resistance from the April highs. There are a number of cases we can make for being bullish but there are also a number of reasons we can give you to be bearish. None of this matter because all we want now is a trend.

In option trading, we use call and put options to play the trend and sometimes those trends are choppy or are hard to read as the market tests support and resistance levels. However, what is different this time is that we are in the perfect storm for a double-digit percentage move in October.

The jury is still out on if the market will break to the upside but if it does it could be dramatic as the bulls are betting on solid 3Q earnings, positive November election results, and the famous Santa Claus rally. The bears will be banking on high-profile companies coming in with earnings misses, higher unemployment, a bubble in gold or other currencies, and the fact that October has seen some of the worst crashes in stock market history.

We have been through 20 Octobers and they tend to be pretty volatile.

We are once again seeing that today.

The market started off strong on better-than-expected economic numbers but one, the ISM monster, put a halt to the bulls rally. The Institute for Supply Management said its manufacturing index for September was 54.4, down from 56.3 in August. A reading above 50 still indicates growth but the bears saw weakness and attacked.

The Dow is currently up 38 points to 10,826 while the S&P 500 is showing a 3 point pop and is at 1,144. The Nasdaq is even at 2,368.

One stock we want to talk about before we leave this morning is Green Mountain Coffee Roasters (GMCR, $28.01, down $3.18). It may help explain how we really think our option trading course will help you find your own trades.

On Wednesday, we talked about playing the GMCR October 30 puts (GMCR101016P00030000, $2.75, up $1.85) which had closed at 8 cents on Tuesday after a SEC revealed the company could be cooking its books. These options opened on Wednesday at 80 cents when the stock dropped from $37 to under $32 and we said there would be good chance you could make a quick 50% plus. Today, you would be up over 200%.

In our manual we talk about these types of situations and we knew which option to play as we said shares could fall below $30. The October put options were a way to play “cheap, “out-of-the-money” options on a stock that is breaking down.

SEC investigations aren’t good and we talk about this in the trading manual so we also listed the GMCR November 30 puts (GMCR101120P00031000, $4.00, up $1.80) on our Watch List when they were at 90 cents Wednesday afternoon. Our Watch List ideas are trades we have in our mind but when our portfolio has over 10 recommendations, we don’t like to issue new ones until those run their course. However, if you use our Watch List like many of our subscribers do, then you would be up 344% in two days and you would be ready for one heck of a weekend.

We believe in money management and risk allocation so we never go overboard on any one trade idea. We explain some of this as well and this is why we have a Watch List.

The point is, when the news hit, we knew which options to play and why. We also knew our entry and exit targets and this is what we want to teach YOU.

Another trade idea you could have played could have been an earnings trade on Gymboree (GYMB, $49.00, up $7.46) which is up 18% today after posting good numbers. Earnings happen every 3 months so there will always be trades and once you get the manual you will know how to find them.

If you would have bought the GYMB October 45 calls (GYMB101016C00045000, $4.40, up $4.15) straight up, betting on a good earnings report, then you would be up 1,660% today as you could have bought 10 contracts yesterday before the market closed for $250. Today, they would be worth $4,400.

If you weren’t sure if the company was going to beat earnings then you could have used the puts as protection and still made money. This is known as a strangle or straddle option trade and instead of making 1,600%, you make 500%.

These types of trades will be hot in the coming months as earnings season kicks off in TWO weeks and our trading manual could not have come out at a better time.

In fact, we are so excited to be teaching you how to find trades that we have included a bonus. If you buy the trading manual this weekend, we will add a FREE one-month membership ($129 value) to our newsletter with your purchase. We will profile quite a few trades on our Watch List and we will also be making a few official recommendations along the way. Deadline ends Sunday at midnight.

We will be back Sunday afternoon with the Weekly Wrap so make sure you check back with us for the latest and greatest as the bulls and bears plan on continued volatility over the next few weeks.

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