Tuesday, November 13, 2012

Diamond Foods (DMND) - Stock and Vol Pop on Pending Restatement; Enormous Upside Vol Diff Opens

DMND is trading $20.02, up 12.2% with IV30™ up 21.2%. The LIVEVOL® Pro Summary is below.


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Diamond Foods, Inc. (Diamond) is a packaged food company focused on building, acquiring and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. The Company sells its products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores and other retail channels.

I found this stock using a real-time custom scan. This one hunts for calendar spreads between the second and third monthly expiries.

Custom Scan Details
Stock Price GTE $5
Sigma2 - Sigma3 > 10
IV30™ GTE 30
Average Option Volume GTE 1,200

The stock has earnings due out tomorrow, so front month elevated vol is expected – and that will spill into the second expiry. The news pushing the stock and vol today is that the earnings announcement tomorrow will also include the re-stated (read: corrected) results for the fiscal years 2010, 2011 and the first three quarters of 2012. This stock made the news when it found itself embroiled in a nasty accounting scandal with charges of bribery.

Source: San Francisco Business Times via Yahoo! Finance; Diamond Foods to release restated results on Nov. 14”, written by Mark Calvey.

Note that all of this was happening while the company was making acquisitions.

Let’s turn to the DMND Charts Tab (2-years), 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 cataclysm which was the accounting scandal. The stock fell from $92.47 on 9-20-2012 to now just over $20. Even more abrupt was the decline pattern itself – rather than a single day of catharsis and stock drop, it was several days of gaps down and new revelations making the prior day’s stories seem worse. It wasn’t pretty. The 52 wk range in stock price is [$16.15, $40.65], but of course, this is a two-year story (or longer).

The fact that DMND will be coming out with revised / restated financials is clearly seen as a positive to the stock price, but a risk elevator as well (read: vol is rising).

To get a better view of the vol, I’ve included the two-year IV30™ chart, below.

We can see how high the implied got during the accounting scandal, but what’s also interesting is the vol rise of late. A lot of that vol rise is the earnings announcement tomorrow – but a piece of it is the restated results coming out with it. The 52 wk range in IV30™ is [44.91%, 140%], putting the current level in the 46th percentile (annual).

But, this is a skew note – and the Skew Tab (below) is quite compelling.

I’ve excluded Nov (with earnings), and am focusing on months two and three. Most notable to me (and highlighted in the image above) is the massive vol diff that has opened up between the upside in Dec and Jan’13. While the ATM vol diff is ~10 vol points, the upside vol diff grows to well over 20 vol points. Some very wide markets in Jan’13 distort the image slightly, but the skew pattern is real. This is a fascinating vol discrepancy IMHO – one well worth examining.

Finally, let’s turn to the Options Tab.

Across the top we can see the monthly vols are priced to 233%, 89% and 79% for Nov, Dec and Jan’13. Of course, that Nov number is crazy high b/c of earnings due out while expiry is in three and a half trading days. Looking down the options montage and comparing Dec and Jan’13 upside, we can see that growing vol diff.

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