Monday, February 25, 2013

Green Mountain Coffee (GMCR) - Depressed Vol; But Parabolic Front Month Skew Reflects Risk

GMCR is trading $44.71, down 1.8% with IV30™ up 1.8%. The LIVEVOL® Pro Summary is below.


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

I found GMCR using a real-time custom scan. This one hunts for depressed vols, and any time this stock shows depressed vol, it feels like a compelling story.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 20
IV30™ Percentile LTE 10
Average Option Volume GTE 1,200

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed to its own annual history (at most in the 10th percentile). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), and I want a minimum vol level so I don't pick up any boring ETF’s (or whatever). The stock price requirement helps me identify names that have enough strike prices to trade or spread.

The GMCR one-year Charts Tab is included (below). The top portion is the stock price the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see what most of us have grown used to, a wildly swinging stock. While the stock does tend to gap on earnings, sometimes it moves abruptly on "unexpected" news. This stock has been in the $110 range and as low as ~$18 all in the last couple of years. That's why the depressed vol caught my eye.

Let's turn to the one-year IV30™ chart in isolation, below.

We can see the vol crush after earnings, which is standard procedure for this stock (and most stocks), but I also note the sort of dwindling downward trend the implied has followed since the earnings vol crush. As of right now IV30™ is just above an annual low.

Let's turn to the Skew Tab.

This is an interesting perspective to keep while discussing the depressed vol. That is, the ATM strike vol for Mar and Apr expiries are similar, but Mar shows a decidedly more parabolic skew. In English, the OTM calls/puts are priced to much higher risk in Mar than in Apr. So, while the implied is depressed, the option market does reflect elevated "wing" risk.

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

Across the top we can see Mar vol is priced to 43.66% and Apr is priced to 42.77%, so less than a 1% point difference. Again, though, check out the vol diff to the OTM options. This could be an interesting trade to analyze: owning vega in Apr while selling the parabolic skew in Mar.

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This is trade analysis, not a recommendation.

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