McMoRan Exploration: Elevated Implied, Depressed Earnings Vol

McMoRan Exploration Co. (MMR) is engaged in the exploration, development and production of oil and natural gas offshore in the Gulf of Mexico and onshore in the Gulf Coast area of the United States.

MMR just came up on a real-time custom scan. This one hunts for calendar spreads between the second and third months. With earnings due out in the the third month and what seems like perpetually elevated implied to historical realized vol, this could be an interesting vol note.

Custom Scan Details
Stock Price GTE $5
Sigma2 - Sigma3 GTE 7
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 and LTE 50
Sigma2, Sigma3 GTE 1

The goal with this scan is to identify third months that are cheaper than the second month by at least 7 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.

Let's start with the Skew Tab.



It's the yellow and green curves that we are looking at with respect to the month 2 to 3 calendar spread scan. We cas see that Mar is elevated to May and it's a bit flatter than the other two months (Jan and May). The last two earnings cycles for MMR in this time frame were 4-18-2011 and 4-19-2010 with prior earnings releases on 1-18-2011 and 1-19-2010. The most recent earnings announcement for MMR was 1-17-2012. So, it's a reasonable guess that the next earnings release should be in Apr -- outside of the Mar expiry and well within the May expiry.

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).



We can see in early Nov that the HV20™ decoupled from the IV30™. Or, in English, the blue line and red line crossed and started diverging. The implied has been trading well above the historical realized short- and long-term vols now for a few months.

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



Check out the monthly vols at the top: 83.68%, 92.69% and 81.47% respectively for Feb, Mar and May. The vol comps right now are:

IV30™: 86.25%
HV20™: 44.51%
HV180™: 64.62%

So, May is below the 30-day implied while Mar is above. Both of those numbers are significantly elevated to the historical realized vol. Again, earnings are due out in Apr.

Disclosure: This is trade analysis, not a recommendation