Tuesday, June 17, 2014

* NFLX, TSLA, TWTR - How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind.

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The Symbol Summaries for NFLX, TSLA and TWTR are included below, with the recent changes in stock price.

Provided by Livevol

I have written exhaustively on how low implied volatility has been, not just in the overall market (i.e. VIX), but also in several individual names. You can read the relevant articles below:

Netflix (NFLX) - One Day of Risk Analysis: Is the Option Market Wrong, Again?

Tesla Motors (TSLA) - Stock Rips, Risk Rises; Has the Correlation Trade Broken Down or Is this a One-day Phenomenon?

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

And even on the VIX itself:
VIX - 7-year Lows Breached. The Calm Priced into the Market is Stunning. But Did You Know This?

In each of those individual stock cases, the implied volatility (the forward looking risk as reflected by the option market) was dipping in strong correlation with the VIX. Or, in English, the implied volatility was dipping in these stocks just as it was dipping in SPX (VIX is that measure). I postulated in each one of these names, and several others, "has the option market fallen into a dangerous malaise?"

The answer is a resounding yes. While volatility is often times (most times) associated with downside risk, if there's anything we can learn from the current market it's that, upside moves can be as abrupt and as large as downside moves.

The option market was wrong (fact), it is wrong (opinion) and that incorrect pricing of risk (upside or downside) is symptomatic of a market that is pricing in equilibrium (low implied volatility) but is in fact nowhere near equilibrium. When a market mis-prices risk so vastly, it can be an indicator of violent moves ahead.

Nothing in the stock charts point to equilibrium; nothing in those charts points to a settled equity value, and nothing in those charts points to rational reasoning of malaise.

Lets take a look at the stock price charts of the three companies we are focusing on today, below.

Provided by Charles Schwab optionsXpress

What about any of those charts points to equilibrium? What about any of those charts points to "low risk?" I hate it when people answer their own questions, but I'm going to do it this one time:

Nothing in those charts points to equilibrium; nothing in those charts points to a settled equity value, and nothing in those charts points to rational reasoning of malaise.

Let's turn to the IV30™ charts in isolation, below.

Provided by Livevol

These charts reflect the forward looking risk in the stock price as reflected by the option market. For each one we can see that the forward looking risk right now is still quite low; remarkably low. That reflects a sort of "equilibrium" in the stock price, an equilibrium which we just saw does not exist and we have no reason to believe it will exist any time soon.

So here's the question: What the hell is going on in this market, right now?

This is trade analysis, not a recommendation.

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1 comment:

  1. Volatility sellers found to make more money by keeping IV low and pulling in more retail traders