Monday, February 28, 2011

Green Mountan Coffeee (GMCR) - Calendar Spread and Earnings Moves

GMCR is trading $41.83, up 0.6% with IV30™ down 0.7%. The LIVEVOL® Pro Summary is below.


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Green Mountain Coffee Roasters, Inc. is engaged in the specialty coffee and coffee maker businesses.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 front month vol simply because earnings are approaching.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

We can see how the front month is elevated to the back. But, also interesting, we can see Jun is depressed relative to the front two months as well. I mention Jun because it has the next earnings cycle. GMCR is known as a stock that moves rather abruptly on earnings releases. I've included some stats for the last six earnings cycles below.

In English, GMCR has averaged a $3.22 absolute move over the last six cycles or 10.7%.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

I've highlighted the earnings cycles. In terms of vol (bottom portion), the IV30™ is elevated to the long-term historical realized vol (HV180™). A sale of that vol seems worth examining.

Finally, let's look to the Options Tab (below).

Potential Trades to Analyze
1. Calendar spread Mar/Apr:
Sell the Mar straddle @ $5.30 ~ 70 vol.
Buy the Apr straddle for $7.40 ~ 62 vol.
Pay $2.10 to own Apr vs. Mar.

2. Calendar spread Mar/Jun
Sell the Mar straddle @ $5.30 ~ 70 vol.
Buy the Jun straddle for $10.55 ~ 62 vol.
Pay $5.25 to own Jun vs. Mar. Another reminder -- Jun has an earnings cycle.

3. Tricky Calendar Spread
Do #1. If that works out well, sell April twice (once to undo the long, and a second time to get short). Buy Jun against that short April. If this trade works out (i.e. the stock doesn't move a lot) through Apr expo., it could end up owning the Jun earnings straddle for a steep discount.

4. Complete 180:
Buy the Mar vol naked -- perhaps it's elevated for a good reason.

This is trade analysis, not a recommendation.

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