Trade Summary: May 19, 2014
May 19, 2014
Trade Rationale
The financial headlines have unsurprisingly been focused on stocks and bonds these past few weeks. Yes, that’s par for the course – especially with the very apparent rotation into safer companies, income stocks, and bonds. Not to mention bond prices are on the upswing again as 10-year Treasury yields have once again reached 2.5%.
Somewhere lost in all the financial news is the performance of commodities. Sure, you may know what gold and crude oil are doing, but what about sugar? How about wheat? More importantly, did you realize the price of coffee has basically gone straight up since February?
It’s true. Prior to February of this year, coffee prices were sitting at $1.20 per pound or below. But since then, the price of coffee has soared to as high as $2.10 per pound. Basically, a drought in Brazil, the world’s largest coffee producer, has cut production expectations by 10%. That’s a big chunk of supply.
The numbers coming out of Brazil are starting to support the dire predictions. And, many analysts think coffee could jump to $3 per pound before all is said and done.
As such, we’re going to make three trades related to the spike in coffee prices. We’re going to take a bearish position in two companies we believe will be hit by higher coffee prices. And, we’ll go long one company that will thrive despite the higher price of America’s favorite morning beverage.
First off, we’re going to buy puts on Keurig Green Mountain (GMCR). The single-serve coffee company is already struggling to keep margins low. An increase in coffee prices will only serve to put more pressure on margins. Keep in mind, Keurig users are often times trying to save money on coffee by making it at home.
Next, we’re going to take a short position on McDonald’s (MCD). MCD’s coffee business has been good over the years as an alternative to pricier options such as Starbucks (SBUX). But, the company is extremely cost conscious and won’t be able to keep its coffee prices low if their suppliers raise prices.
On the other hand, Starbucks itself will be just fine. We’re going to take a bullish position on the coffee shop giant because of the loyalty of its customers. When coffee prices rise, SBUX simply raises its drink prices. And customers keep on buying. Price changes won’t deter your typical Starbucks client from getting their triple-vanilla-half-decaf grande latte.
There you have it. Three trades to profit off the rise in coffee prices. Keep reading for the details of each trade.
Trade Details
#1) Buy Keurig Green Mountain (GMCR) July $100 Puts up to $2.40
We’re looking for GMCR to move lower. Our first profit point for conservative traders is at $98. For aggressive traders, you can hold down to $90. For risk control, the conservative exit level is $120. $125 is the final exit level for aggressive traders.
#2) Buy McDonald’s (MCD) August $100 Puts up to $2.30
Like GMCR, we’re looking for MCD to move lower. Our first exit point for conservative traders is at $97.50. For aggressive traders, you can hold to $95. For risk control, the conservative exit level is $105. And, $107.50 is the final downside exit level for aggressive traders.
#3) Buy Starbucks (SBUX) July $72.50 Calls up to $1.75
In this case, we want SBUX to go higher. Our first profit-taking exit point for conservative traders is at $74. For aggressive traders, you can hold to $78. For risk control, the conservative exit level is $67.50. $65 is the final exit point for aggressive traders.
Category: AOA Trade Summary
