Tuesday, November 29, 2011

Central European Distribution (CEDC) - Stock Pops on Equity Stake... Why Does Vol Drop?

CEDC is trading $4.27, up 25.5% small with IV30™ down 6.9%. The LIVEVOL® Pro Summary is below.


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Central European Distribution Corporation (CEDC) operates primarily in the alcohol beverage industry. CEDC is a producer of vodka and is Central and Eastern Europe’s integrated spirit beverages business.

This stock caught my attention for several reasons, perhaps the most apparent being the stock pop, up more than 25%. Let's start with the news:

Russian Standard Corp discloses 9.9% stake in 13D filing [...]
"The Reporting Persons acquired the securities as a strategic investment because the Issuer operates in segments complementary to the Reporting Person's premium spirits business -- wine and low and mid-priced vodka, and has strong positions in the Eastern European spirits market."
Provided by Briefing.com (www.briefing.com).

So, in English, a meaningful company has taken a stake in CEDC. Before we look at the option and vol stuff, let's peek at an interesting article from The Motley Fool:

What's going on with the inventory at Central European Distribution? I chart the details below for both quarterly and 12-month periods.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Let's dig into the inventory specifics. On a trailing-12-month basis, finished goods inventory was the fastest-growing segment, up 35.1%. That can be a warning sign, so investors should check in with Central European Distribution's filings to make sure there's a good reason for packing the storeroom for this period. On a sequential-quarter basis, each segment of inventory decreased. With inventory segments moving opposite directions for the periods we're considering, this one is a toss-up.

Source:Here's Why Central European Distribution's Latest Report Might Worry You, written by Seth Jayson.

Pretty cool analysis regarding inventory, or more specifically, breaking an aggregated inventory number into meaningful subsets.

Let's look to the Charts Tab (6 months), 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 implied has been rising with the realized movement of the stock. IV30™ had risen from ~84 to ~190 while HV20 went from ~88 to ~209 from 10-24-2011 to 11-25-2011. With today's move in vol, a rather large gap has opened between the short-term realized historical vol and the IV30™.  Apparently the elevated implied was reflecting some sort of risk that has been somewhat ameliorated with the 9.9% stake...?...

Let's turn to the Skew Tab.

The skew holds a "normal" shape over both of the front two expirations, with the front elevated to the back across all strikes. The 4 strike puts show a ~24 vol diff from front to back. Hmmm...

Finally, let's look at the Options Tab.

Possible Trades to Analyze
What I didn't show in the 6 month chart was the catastrophe that has been this stock's performance over the last 12 months. The 52 wk range is [$2.75, $28.08]. Yeah... $28... Ouch...

Earnings reports have tended to lead to large falls, including 40% (ish) drops on 3-1-2011 and 8-4-2011 (both off of earnings).

This pop seems a bit extreme given the news, but then again, WTH do I know?  Is there less risk in the stock now?  Was the risk that was reflected one that involved an equity stake or solvency?  The Dec/Jan 4 put spread cost ~$0.40 and sells ~20 points higher vol than it purchases... But, this was a $3.40 stock yesterday, so,ya know...

Another interesting position to examine could be the Dec/Jan 4/3 put spread -- paying even to own Jan vs Dec and owning that vega in Jan should the stock crack back down below $4. Of course that short gamma will sting a bit should the stock dip below the short strike.

This is trade analysis, not a recommendation.

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