DISH - Risk Explodes to Unprecedented Levels; How Takeover Rumors and Mergers Have Changed Everything

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DISH is trading $61.82, up 2.7% with IV30™ up 10.3%. The Symbol Summary is included below.

Provided by Livevol

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UPDATE 5-12-2014
AT&T considering making bid for DirecTV within two weeks
The merger could eclipse the planned Comcast, Time Warner Cable deal.

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So there's news here... a lot of it. Earlier in the week there was a rumor that AT&T (T) may be looking to purchase Direct TV (DTV).  Of course there was no public comment from either firm but one interpretation is this:

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"DirecTV likely leaked the AT&T overture to put regulators "on notice (that) if you approve Comcast, we'll be next in line," Swann says. "The FCC has to ask if they want to open what could be a Pandora's box" (Phil Swann of TVPredictions.com).

Source: USA TODAY Media merger mania could swell in wake of Comcast deal, written by Mike Snider, and Roger Yu.

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The catalyst to this news was quite clearly the Comcast $45 billion bid for Time Warner, which is under regulatory review.  That merger would create a behemoth, so the regulators are going to have to look closely.

A DTV and T deal would accelerate the transformation of the pay TV world.  DTV is the second largest pay TV operator in the United States... second to Comcast.  DTV and T combined would make a ~27 million customer giant compared to Comcast and Time Warner deal of 30 million customers.

Interestingly, DTV was rumored to have been approached by DISH recently, which is its largest satellite TV competitor.   In any case, a new regime seems to be in play, one of major consolidation.

If a DTV and T merger happens, you have to expect DISH is next in line.  Perhaps a DISH and Verizon deal is in the making?

What does that mean for consumers?
1. Changes to our subscription packages.
2. Changes to our prices -- and by change, I don't expect down.

 Adding to the complications:

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Netflix announced connection deals with Verizon and Comcast; and Apple had reportedly approached Comcast, too. Not to be forgotten: Sprint's expected attempt to buy T-Mobile, and TV upstart Aereo's challenge to broadcasters is under review by the Supreme Court.
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That same article goes on to read: "A common thread to all of these: "A trend to get bigger and amass more market share and be in a better position to dictate terms," says Phil Swann of TVPredictions.com" (Phil Swann of TVPredictions.com).

So that's the story, now let's turn to DISH in particular. The Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

DISH stock has exploded over the last two-years from ~$26 to as high as $64 just about a month ago.  For the record, DISH is a $28B market cap firm, so this is no small potatoes here.

We can also see, more recently, how the stock price dropped abruptly to the ~$55 level but has popped again.  And why wouldn't it?....

To add more confusion and risk to the discussion, DISH is reporting earnings on 5-8-2014 before the market opens.  Does the option market reflect risk... Yeah... you're damn right it does.

Let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

DISH's volatility is now at unprecedented levels over the last two-years.  Equally as interesting, the implied volatility has risen from 27% on 3-21-214 to now ~58%.  We're talking about more than a 100% rise in six weeks.

Surely a part of that is simply the earnings event due out soon, but the highest volatility has been into earnings before this cycle was ~49% (the blue "E" icons represent earnings releases).  Keep in mind, as earnings approach, that volatility level should increase, totally independent of the deal news swirling around.

One way the volatility goes down... fast... A serious buyout bid that is met with welcome arms.  this buyout news, rumors, etc has shifted risk in another way, beyond just the overall level. The Skew Tab snap (below) illustrates the vols by strike.

Provided by Livevol

Note that skew shape is essentially parabolic, reflecting equal likelihood of tail risk to either side (up or down).  This is normal skew shape for an earnings event, but not normal for a :quiet period."

But the real question is, how does the skew look today relative to the past for DISH?  Well, here you go.  The image below shows the skew one week prior to the earnings event in February of this year.

Provided by Livevol

Check that out... a totally different shape.  The upside risk reflected by the option market now (as of today) was non existent in the prior earnings period.  So, why do we have upside skew now?... it's gotta be the takeover news.

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

It's a bit early to do this, but for the sake of completeness the $61.5 strike straddle tells us that the option market has priced in a stock price range of [$56.50, $66.50] by the end of trading on May 9th.

• If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
• If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
• If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Follow @OphirGottlieb

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