Thursday, August 21, 2014

* Twitter (TWTR) - Unprecedented: Risk Breaks All-time Lows; Stock Moves in Huge Cycles.

Share on StockTwits

TWTR is trading $45.00, down small with IV30™ down 1.6%. The Symbol Summary is included below.

Provided by Livevol

The future risk in TWTR stock price as reflected by the option market (implied volatility) is at an all-time low.  The stock has moved abruptly in three different cycles since going public and in the prior times when the implied volatility reached lows, the stock moved significantly more than the option market was pricing.

Here are two prior posts on TWTR and this phenomenon:

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

TWTR - How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago.

"This was one of the greatest mispricings of volatility by the option market on a multi-billion dollar company that I have seen in several years. The 57.22% volatility now stands at 111.25% and the stock has moved ~30%."

The all-time stock charts is below.

Provided by Charles Schwab optionsXpress

While I read some notes, now and again, that TWTR stock doesn't move much.  I gotta say... huh?

Since IPO the stock is essentially unchanged, but it has actually had three abrupt stock cycles.

Cycle #1: From IPO to the end of December, the stock rose 70%.
Cycle #2: Then the stock dropped 60% through May 2014.
Cycle #3: Since May, the stock has exploded up 52%.

Sure, endpoint to endpoint the stock hasn't moved, but in reality, this stock has seen some very volatile cycles.

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

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  Note that the risk (the red chart) is at its lowest point... ever.  Yep, the risk in TWTR as reflected by the option market has never been this low.

So... why is this happening?... It's certainly possible that the last two times the risk was 'super' low and the stock moved was just a 'moment in time'  The past does not guarantee the future. But...  it's also all we've got.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$41.50, $48.50] by the end of trading on Sep19th.

  • 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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