Friday, August 15, 2014

* Monster Beverage (MNST) - Stock & Risk Explode. Explicit Answer: Fair Value Now Is...

Share on StockTwits

MNST is trading $91.34, up 27.5% with IV30™ up 32%. The Symbol Summary is included below.

Provided by Livevol

Here's the news
Monster shares soared $21.66, or 30.23%, to $93.31 Friday morning, a day after the deal was announced after the close of trading. The companies said Coca-Cola will take a 16.7% stake in Monster, as part of a $2.15-billion all-cash deal.

Source: LA Times via Yahoo! Finance Monster Beverage shares soar 30% after Coke deal announced

But the truth is, this stock didn't just pop today, this has been a a several day phenomenon which started with earnings, and now it's time to look at the risk.

The three-year stock chart is included below.

Provided by Charles Schwab optionsXpress

MNST has hit an all-time high, and while it's up ~30% today, this is the real move:

Aug 7: $65.10
Aug 8: $69.45
Aug 13: $71.65 (earnings)
Aug 14: $91.34 (today)

That's a 40% move in a week.

The stock movement of late is clearly not an indicator of any sort of 'normal' volatility as it moved off of (1) earnings and (2) ya know.. the Coke news...

The question now is: what is the equilibrium stock price and the equilibrium risk moving forward in that stock price?

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. We can see the spike today in the vol -- a good lesson to remember that implied volatility doesn't always go down when a stock goes up.

The fact that the implied volatility is up so much today reflects an uncertainty (risk) in the equilibrium price after this momentous news.  Clearly the stock is higher, but higher where? $90? $100? $80?

Believe it or not, there is one place that explicitly allows us to see what the market is pricing as equilibrium and that is my favorite market of them all: the option market.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$81, $99] by the end of trading on Sep 19th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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