Plug Power (PLUG) - Earnings Preview: Citron Didn't Just Change the Stock Price; Risk Shifts

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PLUG is trading $6.93, up 14.9% with IV30™ down 3.4%. The Symbol Summary is included below.

Provided by Livevol

This is an earnings note -- with the event due out tomorrow morning before the open. I have written about plug recently, so for a history of the company, you can read this post:

Plug Power (PLUG) - Why a Company with $25M in Revenue is up 5,000%

But let's focus on the earnings event. To do that, we have to start with the Charts Tab (two-years), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

Bottom line, PLUG was $0.15 nine-months ago, hit as high as $11.72, and then yesterday plunged down 41.5% yesterday on a note from Citron.  Here are those highlights:

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In an unsigned note, the firm called PLUG a "casino stock" and suggested it would return to its one-time trading price of $0.50. They write:

A casino stock... is the lowest form of speculative moonshot. A casino stock can trade twice its outstanding shares in a single day, while turning over its entire float on people gambling that they can find a buyer at a higher price... Who really cares about anything else, right? The recent volume and share price surge in Plug Power demonstrates how Wall Street treats this stock: nothing more than a casino.

The company has consistently fallen short of its own quarterly forecasts.
There's an apparent lack of conviction among Plug's own management, who at one point refused to buy in on a capital round of just $0.15 a share.
Just one analyst covers the firm — and that same analyst is part of a company, Cowen and Co., that just issued an offering.

Source: The San Francisco Chronicle: A Website Called Plug Power A 'Casino Stock' As It Crashed 41%, written by Rob Wile.
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The note actually went so far to say that the stock would return to $0.50. Let's just say the tone was unambiguous.

Let's turn to the three-month IV30™ chart in isolation, below.

Provided by Livevol

So obviously the implied has been rising and is right at three-month highs. The question: Is the risk reflected by the option market (IV) high enough?

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Interestingly, the skew shape in PLUG is "normal."  This is actually shocking to me.  I would have expected a parabolic skew which would reflect elevated two-tail risk (up and down). In fact, as of a week ago, the skew in PLUG looked like this.



So, it actually had a small tilt upward.  So, that note from Citron not only clobbered the stock, it clobbered the skew.  Absolutely fascinating (but not necessarily correct).  But the "outlook" on PLUG as reflected by the option market has changed -- and rather clearly.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

So, with the stock trading at $6.93, the $7 strike is the ATM.  Mar expiry has 8.5 more trading days and really, earnings are a big piece, but not the only piece of risk left in that expiry.

Right Now
The option market reads that PLUG will in [$4.80, 9.20] by the end of Mar expiry.  That seems like a crazy  wide range but then again... PLUG was $1.55 at the close of 2013 and hit $11.72 yesterday, so...

Conclusion
The rising tide of risk in PLUG is justified, certainly in the short-term.  Investing capital around earnings in the options will require a strong conviction about the importance of the earnings release and the level of stability in the stock price.

There is a change in the upside skew, making upside options slightly less expensive than they were relative to the ATM options as of a week ago. So, that's one perspective, but to play that, one would likely carry a delta, and that risk substantially overwhelms the slight vol edge bet.

My Opinion
Ambiguous, unfortunately:
I think PLUG will stay in the range on expiry, but very well may break it intra-expiry (i.e. pre-expiry) and revert.  Even if the stock stays in the range, that wide range actually feels about right.  PLUG could be at $4 or $9 and I wouldn't be particularly surprised. As far as I can tell, I'm not trading this event, but then again, I always say that and then somehow compel myself to trade.  Whatever the trade, I will hedge options with options -- nothing naked.

One thing to note -- this stock is driven largely by retail money, and that means there could wild swings on earnings and the days following that.  I see no stability or equilibrium in this stock right now.

This is trade analysis, not a recommendation.

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