Wednesday, October 27, 2010

Monsanto (MON) - Elevated Vol, Choppy Stock

MON is trading $59.73, up 1.3% with IV30™ up 13.9% The LIVEVOL™ Pro Summary is below.


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I found this stock using a real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price >= $7 <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

The MON Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see:
IV30™: 59.73
HV20™: 29.91
HV180™: 33.0

So, IV30™ is elevated relative to the short term and long term realized movement of the stock. Look at the stock chart, we can see that on 9-28-2010, MON gapped down nearly $5 on this news from AP:
"A Jefferies analyst said the yield of the agribusiness company's genetically modified corn seed has so far been weaker than expected."

This pushed the HV20™ above 49 at one point, but now enough trading days have passed where that move has rolled out of the average. Note that HV30™ is still 41.

Today there was an apparently positive report that the global seed business looks good going out a few years, stock has rallied a bit and vol is up a lot... Tricky... When it's all said and done, MON is now higher buy ~$4 than it was the day before the gap down.

Let's look to the Options Tab (below).

Possible Trades to Analyze
1. Sell the 60 straddle @$5.00 or ~41.5 vol. Ah, selling options feels so good... I mean, you know, when it works...

2. Pick a side of that straddle to "defend." Buying the Nov 57.5 put for $1.50 still leaves a net cedit of $3.50, so there is no downside risk. It's a winner below $60 at all prices. The upside though, has risk and loses naked above $63.50. To "defend" the upside, it's a bit more tricky. Only a 67.5 call exists. Fair value at 41 vol is ~ $0.40, maybe a $0.50 bid gets hit. That would leave a $4.50 credit, so the trade does lose above $64.50, but stops out at $67.5. The downside in this case would be naked.

3. Do a Nov 55/57.5 1x2 put spread and receive ~$0.02 to cover commissions. This is naked downside below $55, but maybe that's ok?... If MON decides to fall back down below $57.5 (but above $55), this can be a fancy little winner for a credit to enter the position (excluding margin).

This is trade analysis, not a recommendation.

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  1. How does the put spread make any profit?

  2. Ophir Gottlieb said...
    If you're asking about the 55/57.5 p/s, it makes money with MON above $55. It makes max gain with MON at $55 exactly. It's essentially a bet that the stock goes below $57.5, but not below $55.