Earlier today (below) we previewed a few high short interest names that were set to report earnings this evening. Of the names that we looked at, GMCR stuck out to me as the one that displayed the largest disconnect btwn the options market’s expectations, vs its historical average moves and what we feel is the potential for the move following the event.
As stated below, GMCR has had some monster moves in the last 2 years, averaging ~25% until last quarter when the stock traded in an ~8% range on February 6th and closed down only 5.5%.
While the stock has enjoyed fabulous gains up ~43% ytd, the realized volatility in the stock has seen a dramatic slowdown of late, 60 day realized vol is ~34, vs the 120 day realized vol of ~57, yet the implied earnings move suggests that the stock has still be moving similar to the way it was 4 months ago.
We want to use a defined risk options structure to “fade” the high implied move following tonight’s earnings print.
Trade: GMCR ($58.40) Sold the May10th (weekly) 52.50/50 – 65/67.50 Condor at 1.00
Sell the May10th 52.50/50 Put Spread at .52
-Sell 1 May10th 52.50 put a 1 .32
-Buy 1 May10th 50 put for .80
Sell the May10th 65/67.50 Call Spread at .48
-Sell 1 May10th 65 Call at 1.22
-Buy 1 May10th 67.50 call for .74
Break-Even on May10th Expiration (Friday):
This trade is risking 1.50 to make 1.00 in a relatively binary fashion. If the stock finishes between 51.50 and 66 on Friday’s expiration then the trade makes 1.00, below and above those levels it becomes a loser with a maximum loss of 1.50 below 50 and above 67.50.
Risk Chart:[caption id="attachment_25661" align="aligncenter" width="544"] from TradeMonster[/caption]
Trade Rationale: Given the recent price action in similar names like SODA & FSLR following their own results, selling the implied move in GMCR seems attractive given the high implied move despite the recent slow down in realized vol. The story feels less risky to us and we want to fade the move, with defined risk over a short period of time, isolating the earnings event.
One last point, when I executed this trade, the bid ask on the 4 legs as a structure was .80 at 1.30 and I was filled almost mid market.
Previous Post May 8th, 2013: Earnings Cheat Sheet: $TSLA, $GMCR & $GRPN
Implied Move: The options market is implying about a 14% move vs the 4 qtr avg move of ~26% and the 8 qtr avg move of ~25%.
Sentiment: Wall Street analysts are fairly bullish on the stock with 10 Buys, 4 Holds and 1 Sell, with an avg 12 month price target of ~$62. Short interest is at around 27% of the float, up from ~25% in November.
Options Volumes / Open Interest: Another name where the call to put open interest ratio is below 1, despite the huge rally. That ratio stands at 0.6, and even over the last month, the stock has averaged slightly more put than call volume. Just a bit ago, a trader bought the May 50/55 1×2 put spread, 800 x 1600 for .26, this trade is profitable on May expiration if the stock is bwtn 45.26 and 54.74.
Vol Snapshot: May vol is about 110 and June is about 62. IV30 is high but expected given IV levels from its recent reports. June vol should fall to around 40 following the report: