Thursday, May 22, 2014

* Twitter (TWTR) - What Now? Option Market Reflects Low Risk; Last Two-times that Happened, Stock Moved Huge.

TWTR is trading $31.37, down 1.2% with IV30™ up 3.0%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 6-5-2014 (mid-day)

Provided by Livevol

The stock is indeed moving... and I believe more is coming (in either direction)

This is a stock price and implied volatility note.

Conclusion: There may be no real bottom insight to TWTR stock price, and there may be catalysts to upside moves as well, yet the option market is pricing risk at extremely low levels.  The last two times this happened, the stock moved abruptly, and the volatility proved to be too cheap (options were to cheap).

Let's get into it.  First, the stock chart since IPO is included below.

Provided by Charles Schwab optionsXpress

So many things to note here.
1. The stock is trading ~30% lower than its first print on NYSE (not the IPO price, the first trading price).
2. The stock rose from ~$40 to as high as $74.73.
3. Since that peak in price, the stock has cascaded downward to now just above $31, or a 58% drop in just a matter of months.
4. Note the "E" icons, which represent earnings, and how TWTR has done very poorly (stock price) off of those releases.

So that's the stock story... Now, the risk story (implied volatility). Let's turn to the two-year  IV30™ chart in isolation, below.

Provided by Livevol

We can see two phenomena here:

1. TWTR implied volatility (the forward looking risk as reflected by the option market) is near all-time lows.
2. The two times prior that it saw these levels, the volatility exploded higher into earnings (which is normal), and the day of the earnings release as well the few days after saw dramatic price drops.

The first of those very low volatility troughs occurred near Christmas, and I posted this article:
Twitter (TWTR) - UPDATE: How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago.

Noe that in the case above, TWTR stock went from $52 to $74 (all-time high) and the implied volatility went from 57% to 110% all within two weeks.  I note, for emphasis, the stock went up.  So, huge moves rises in implied volatility (risk) aren't always associated with down stock moves.  They usually are but not always.

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

Provided by Livevol

TWTR has consistently shown a parabolic skew shape, which in English means the option market reflects two-tailed risk (upside and downside).  While parabolic skew shape is "abnormal," it's absolutely normal for a stock like TWTR which has been public for less than a year and has seen the stock price swing so dramatically.

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

We can use the option market to see what range stock is reflected for TWTR.  In Jun, using the $31 strike price straddle we get:  [$27.80, $34.20].

  • 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.

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