Carbo Ceramics Calendar Spread Opens in Dropping Stock

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

The news I see for  Carbo Ceramics (CRR) - is a lawsuit -- but other than that, nothing really. Here's a quick snippet covering the legal news:

"Holzer Holzer & Fistel, LLC is investigating potential violations of the federal securities laws by Carbo Ceramics Inc. (“Carbo Ceramics” or the “Company”) (NYSE: CRR - News). The investigation focuses on whether a series of statements made between October 27, 2011 and January 26, 2012, inclusive, regarding Carbo Ceramics’ business, its prospects and its operations were materially false and misleading at the time they were made. Specifically, the investigation seeks to determine, among other things, whether Carbo Ceramics knew but failed to timely disclose that it was experiencing a decline in proppant sales in the Haynesville region." --
Source: BusniessWire via Yahoo! Finance -- Holzer Holzer & Fistel, LLC Announces Investigation into Carbo Ceramics Inc.

That lawsuit news makes it seem like the company just released some poor sales figures and the stock reaction kinda echoes that hypothesis -- call it confirming circumstantial evidence. Let's turn to the Skew Tab.



We can see the front three months show a monotonic increase in vol from back to front. Even more pronounced is the upside skew difference -- the Feb options show higher vol by strike as we move to further OTM calls (higher strikes), which is the opposite of "normal" skew. To read about normal skew and why it exists, you can read this post: Understanding Option Skew -- What it is and Why it Exists

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



The stock gap down of late is pretty impressive. It started with the earnings report and has continued into today. On 1-25-2012 the stock was trading $131.03. As of today (about two weeks later), the stock is down 31%. It is a bit of quandary as to why the vol continues to stay relatively tame. The 52 wk range in IV30™ is [32.62%, 85.93%], so the current level is the 52nd percentile (annual). That's very middle of the road and still below the long-term historical realized vol... The current comps are:

IV30™: 60.17%
HV20™: 93.07%
HV180™: 67.39%

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



We can see Feb vol is priced to 69.27% with Mar priced to 59.34%. The next earnings report for CRR should be in late Apr -- possibly after the Apr expiry cycle.  The elevated front makes sense given how much this stock seems to move with no real end in sight for the downward trend.  The question is, why is the back still priced below the historical realized vol?  The option market reflects lessened risk moving forward.

This is trade analysis, not a recommendation.