Friday, December 14, 2012

Coca-Cola (CCE) - Elevated Vol in Dec and Depressed Earnings Vol Brings to Light Compelling Vol Diff


CCE is trading $31.00, down 0.4% with IV30™ down 2.4%. The LIVEVOL® Pro Summary is below.



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Coca-Cola Enterprises, Inc. (CCE) markets, produces, and distributes nonalcoholic beverages. The Company serves a market of approximately 170 million consumers throughout Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway, and Sweden.

This is a cool calendar spread note -- one which shows not just a vol diff, but one where earnings vol can be owned for less than non-earnings vol and potentially spread on a 2:1 ratio.

I found CCE using a real-time custom scan I built that hunts for calendar spreads between the front two monthly expiries.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 > 7
IV30™ GTE 30
Average Option Volume GTE 1,200

The goal with this scan is to identify back months that are cheaper than the front by at least 10 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume) and enough strikes to spread and thus a minimum stock price. I also require a minimum vol level in order to avoid any boring ETFs (or whatever).

The one-year CCE 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 a very nice appreciation over the last year -- a move from $25.26 to now $31 on a 25% vol stock. I do note the very recent stock decline.

On the vol side we can actually see how the implied has risen well above the two historical realized measures but I also note how the implied has been dipping with the recent stock drop -- a bit odd.

But, ultimately, this is a skew note, so let's take a look.



We can see two phenomena here, both of which are quite compelling. First, note how elevated Dec vol is to the back two expiries. Second, note that earnings should be in the Feb cycle, yet Feb is the lowest priced (in terms of vol) of the front three expiries -- very odd. The last two earnings reports for CCE in calendar Q1 were 2-11-11 and 2-9-12. It's a very reasonable assumption that the next earnings release will also be in early Feb.

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



Across the top we can see the monthly vols are priced to 39.03%, 24.71%, 24%. An interesting position to examine would be to own Feb with earnings and sell that elevated Dec. If the trade works out, then selling the Jan vol still covered by Feb could turn into a very cheap Feb position protected by an earnings release embedded in the options. Ya know...or not...

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