Monday, March 7, 2011

Central European Distribution (CEDC) - Vol Opportunities After Stock Collapse

CEDC is trading $12.77, down small with IV30™ down 5.6%. The LIVEVOL® Pro Summary is below.


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Central European Distribution Corporation (CEDC) operates primarily in the alcohol beverage industry.

Here's the news from earnings results on 3-1-2011:
Shares of Central European Distribution (Nasdaq: CEDC) dropped as much as 30% in intraday trading Tuesday after the vodka maker's quarterly results and full-year forecast fell well below Wall Street expectations.
Source: The Motely Fool, by By Brian D. Pacampara.

So the stock went from $22.85 down to $14.33 in one day, and now has dipped even lower. Today the company has traded over 5,000 contracts on total daily average option volume of just 1,405. Puts have traded on a nearly 6:1 ratio to calls and a vol difference has opened up between the front two months as well as a two-sided skew in the front month. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) is included below. The action is the back months, but I've only included the front months as it's the vol diff and front month skew that interest me.

The Skew Tab snap (below) illustrates the vols by strike by month.

We can see the vol difference between the front two months and the skew shape in Mar where the ATM vol is below both the upside and the downside.

We could make a pretty good argument that vol and skew should be elevated in the front month given the news, the initial stock move and then the residual stock move.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock tumbled off earnings and has continued its downward momentum.

Possible Trades to Analyze
1. Put spread in Mar:
To bet that the stock keeps sinking, you can examine purchasing the Mar 10/12.5 put spread for $0.50. That yields a 4:1 MaxGain:MaxLoss ratio and sells ~107 vol ($0.10) and purchases ~82 vol. So a 25 point skew scalp.

2. Put spread in a Mar/Apr calendar:
If you think CEDC is headed lower, but will stay above $12.5 (ish) to Mar expo, you can examine the Mar/Apr 12.5 put spread for $0.55 (or less). That's ~ an 8 point vol difference between the front two months. An extension to this trade is to sell the Apr 10 put after Mar expo if the trade works well. This would allow a leg into an Apr 10/12.5 put spread for a discount.

3. Call spread:
If you want to make a bet that CEDC rallies from here you can examine a Mar/Apr call spread for $0.95, or even try a Mar 12.5/15 call spread. Both of these trades would sell higher vol than they purchase.

This is trade analysis, not a recommendation.

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