Tuesday, November 18, 2014

* Keurig Green Mountain (GMCR) - Unprecedented, Stunning Risk Phenomenon into Earnings

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GMCR is trading $157.40, up 1.9% with IV30™ down 2.7%. The Symbol Summary is included below.

Provided by Livevol

GMCR is up 465% in the last two years and the firm has earnings due out this Wednesday after the bell. The financial measures and trends are astounding... but there's one more astounding "thing." Risk as reflected by the option market is lower than it has ever been, and that is... really weird.

I penned an article just pubished today on Benzinga that surrounds the financial measures for the firm. Here it is:

I'll be a little tricky and "borrow" one of my charts for this article:
Revenue (TTM) and Net Income (TTM)
Since 2007, revenue has grown 16-fold ($281 million to $4.6 billion) as net income has grown 64-fold ($9 million to $582 million).

Provided by Capital Market Laboratories

Read the Benzinga article for more incredible charts surrounding the business... I'm moving toward the stock price and then option pricing.

The two year stock return chart is included below.

Provided by Livevol

That gorgeous run-up is based in large part to that first financial time series I provided above.  Revenues and earnings are booming.  The Benzinga article has the rest.

Let's turn to risk, because when it comes down to it, this is a breathtaking risk story. The IV30™ chart in isolation is included below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  The blue "E" icons represent passed earnings dates and I have circled the level of implied volatility ("risk") per the option market for each date.  What we see are two phenomena:

1. The risk has systematically been lowering for each earnings release (almost monotonically)
2. This time, the IV30 has fallen below 50% to ~47% and the prior low was 59%.  no other earnings date saw anything below 60%.

This is a really interesting result and reflects a risk by the option market that in words reads:
"The risk in earnings for GMCR is lower than it has ever been."

I guess it depends on your opinion as to whether you agree or not...

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$144.50, $170.50] by the end of trading on Nov. 21st.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
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