Yesterday’s afternoon rally has reversed entirely, as indexes are trading back near the lows seen less than 24 hours ago. There was one piece of economic data released today, which showed producer prices coming in lower-than-expected. Monetary policy doves could use this information to support a case for more stimulus going forward, and price action in metals and miners is reflecting this. Stocks are significantly lower, however, led by the Dow Industrials, which are off about 0.7% for the session. Today’s relative strength leader is the Russell 2000, which is lower by only 0.2%. Bonds are trading near breakeven, while gold and silver are each about 1% higher.
CHART OF THE DAY
Green Mountain Coffee Roasters (GMCR) – The coffee producer recently reported its earnings for the second quarter, but the stock didn’t react much at all to those numbers. As a result of this, implied volatilites on GMCR options plummeted, offering a nice spot here to make a market-neutral bet on increasing volatility going forward. Ahead of earnings, front-month options were running at implied volatilies of about 115%, and now October options on GMCR are priced at about 45%. GMCR is historically a very volatile name, and given that short interest remains at nearly 25% of the stock’s float, it could be setting up for another big move in the near future. Given that volatility is mean reverting by nature, the recent choppy period will likely be met with some directional trend in the near future. Plotting the Bollinger Band width on a weekly basis is a good way to track longer-term trends in volatility, and you’ll notice that the current levels coincide with areas in the past that have led to big moves by the equity.
I like buying an October $77.50 straddle on GMCR for about $12. This trade will profit on a move above $89.50 or below $65.50 by October 18. This trade is currently an open position for subscribers of Schaeffer’s Volatility Trader service.
WHAT I’M EXPECTING
I’m looking for the recent range to break between now and next Wednesday, when we will see the July FOMC minutes. Tomorrow is loaded with potentially market-moving economic data, and Friday is options expiration for August. Additionally, there are five bond auctions between next Monday and Wednesday, and any significant developments could spark some volatility in equities.