Wednesday, March 9, 2011

Green Mountain (GMCR) - Rising Vol and Stock; Calendar Spread

GMCR is trading $43.37, up 5.9% with IV30™ up 10.3. 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).

To the downside, the vol difference opens up even wider (which is normal). The Mar options (weighted average) are priced at ~77 vol and the Apr options at ~62 vol.

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).

What I'm interested in here is the vol portion. We can see that the IV30™ is high relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

IV30™: 62.86
HV20™: 53.79
HV180™: 53.51

This stock can gap -- check out several large moves highlighted in the chart (top portion).

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

Potential Trades to Analyze
First, just because the front is elevated to the back, doesn't mean a calendar spread is a good bet. We've seen above that GMCR can gap even without an earnings release to power the move. Having said that, let's look at some possible vol spreads.

1. Wide calendar Mar to Apr:
Sell the Mar 40/46 strangle @ 1.95 or ~78 vol.
Buy the Apr 40/46 strangle for $4.25 or ~62 vol.
The wide strikes (read: far OTM) give the stock some room to move before blowing through the short strikes. This trade bets that GMCR stays inside the ($40, $46) (ish) range by Mar expo.

2. Bet deltas through skew:
1. Buy the Mar 44/48 call spread for $1.25. This creates a 2.2:1 MaxGain:MaxLoss ratio and sells ~ the same vol it purchases in a call spread, which is not the normal case.
2. Buy the Mar 40/43 put spread for $1.10. This creates a 1.7:1 MaxGain:MaxLoss and sells ~ 3 point higher vol than it purchases -- not the greatest skew trade of all time, but worth checking out.

3. Buy the vol:
Buy the ATM vol in Mar and bet that the higher risk reflected in the Mar options is actually under priced. The 43 straddle can be bought for ~$4.25 and the stock has moved ~$2.50 today.

This is trade analysis, not a recommendation.

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