Friday, October 25, 2013

Archer Daniels (ADM) - Stock Breaches 5-year High as Volatility Breaches Annual High into Earnings. Is This Equilibrium?

ADM is trading $39.55, up 0.9% with IV30™ up 6.1%. The LIVEVOL® Pro Summary is below.

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Archer-Daniels-Midland-Company, is engaged in the processing of oilseeds, corn, wheat, cocoa, and other agricultural commodities. The Company manufactures protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients.

I found this stock using a real-time custom scan. This one hunts for elevated vols. Now this firm does have earnings due out on 10-29-2013 (BMO), but the stock price has just breached a five-year high. This story has some teeth to it.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 30
IV30™ Percentile GTE 80
Average Option Volume GTE 1,200

The two-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).

Check out that stock rise since Nov of last year.  We're looking at a stock that went from ~$24 to now ~$40 or a ~70% in less than a year.  And just to be clear, this is a $26 billion firm, so this is serious money. The stock price today has eclipsed a five-year high, so whatever management has been doing, from the outside looking in, it looks pretty damn good... of course that's from the outside looking in (which has its limitations).

But this is also a volatility story, so let's turn to the one-year IV30™ chart in isolation, below.

We can see the implied has now reached an annual high, but we can also see that in general the implied has been rising with the rising stock price which is "not normal," but is revealing.  I'd say while ADM has grown $10B+ in market capitalization, the option market doesn't quite reflect equilibrium... in fact, it reflects quite the opposite, which is growing risk.

The earnings report due out in a few days could be critical in determining if ADM's rise becomes a comfortable new valuation for the firm (that would be seen if the stock price remains steady or increases off of the release) or if the lack of equilibrium reflected by the option market reveals itself to be true in an abrupt downward stock move. We shall see...

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

Across the top we can see the monthly vols are priced to 34.59% in Nov and 28.12% in Dec.  That vol diff is due to earnings.

This is trade analysis, not a recommendation.

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