Name That Trade – $SODA Pop?

by Dan July 8, 2014 9:54 am • Commentary

Back in early February, Coca-Cola (KO) and Green Mountain (GMCR) entered a  strategic partnership for:

the development and introduction of The Coca-Cola Company’s global brand portfolio for use in GMCR’s forthcoming Keurig Cold™ at-home beverage system. Under the global strategic agreement, GMCR and The Coca-Cola Company will cooperate to bring the Keurig Cold™ beverage system to consumers around the world. In an effort to align long-term interests, the companies also entered into a Common Stock Purchase Agreement whereby The Coca-Cola Company will purchase a 10% minority equity position in GMCR.

The stake at the time was worth$1.25 billion, and KO raised their stake in mid May to 16%, becoming the single largest shareholder.  This has obviously been very good news for GMCR’s survival, as it wasn’t too long ago that some savvy hedge fund investors seriously questioned the company’s accounting and business model.  With GMCR trading within 2% of the stock’s all time highs, and sporting a $20 billion market cap, the much smaller at-home cold beverage maker SodaStream (SODA) is starting to pique my interest.  The stock just yesterday made fresh 52 week lows, trading at 1x expected 2014 sales that are expected to grow 12%, and 16x 2014 earnings, expected to decline 21%  from 2013’s peak of $2.48.

Since the KO/GMCR linkup, there has been a ton of speculation of who would buy SODA, ranging from logical choices like Pepsi (PEP) to Starbucks (SBUX), and the stock has been very prone to squeezes on such news with 32% short interest.  Since the stock’s latest bout of takeover spec in late April (when we exited our investment portfolio position in SODA for a profit after the rumors seemed exaggerated), the stock is down 32%.  Obviously few investors think it is likely to happen, with the once-largest shareholder Fidelity liquidating 82% of their stake in their latest 13f filing.

SODA’s stock chart is like watching a slow moving train-wreck, down more than 50% from the 52 week highs, and quickly approaching 4 year lows:

SODA 5yr chart from Bloomberg
SODA 5yr chart from Bloomberg

Before dipping my toe in the water for a speculative contarian play in the stock, I will have to get a lot more comfortable from a fundamental standpoint given the terrible price action.  That’s why I am looking at the options market to see if there was a way to make a near term defined risk way to play for a bounce.  Despite 30 day at-the-money implied vol (IV) recently bouncing off of 2014 lows, the stock is still a 50 vol name, implying 3% plus movement a DAY!

SODA 1yr chart of 30 day at the money IV from Bloomberg
SODA 1yr chart of 30 day at the money IV from Bloomberg

To put SODA’s options prices in context, with the stock about $32.25, if you bought the August 32.50 straddle (long the call and the put) it would cost about $4.70, and you would need a 15% move in either direction to just break even!  This is a bit of a special situation given the stock’s recent decline, and the fact the company should report Q2 earnings in this time period, but you get the point. The options market makers have their antennae up on this one and long premium directional trades in the options market will be very hard to make money.  

One options trade that stuck out to me was possibly fading the near term fear, and selling the Aug 32.50 straddle at $4.70 and using the proceeds to buy the Oct 30/35 Strangle for about $4.60 (long the Oct 30 put and the Oct 35 call.) That structure benefits from a difference in implied volatility between the months but with August catching the earnings report and currently around 55 vol, we’d probably want to wait a little on the trade to get maximum earnings vol of closer to 70.  We are going to do a deeper dive on the fundamentals and try to arrive at a directional trade that makes sense, but in the meantime we thought we would introduce a trade structure that could be interesting as we get closer to Q2 earnings.