Tuesday, October 4, 2011

Pandora (P) - Vol Pops to All-time High as Stock Dips

P is trading $11.88, down 11.0% with IV30™ up 7.9%. The LIVEVOL® Pro Summary is below.


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Pandora Media, Inc. (Pandora) is an Internet radio in the United States. As of January 31, 2011, it had over 80 million registered users. The Music Genome Project and its playlist generating algorithms enable it to deliver personalized radio to its listeners.

P has hit an all-time high in IV30™ today. I found it by using a custom scan that searches for names where IV30™ is up at least 10% on the day. The scan details are below with a snapshot if you want to build it yourself in Livevol® Pro.

Custom Scan Details
Stock Price GTE 10
Average Option Volume GTE 1,200
Days After Earnings GTE 5 and LTE 60
IV30™ Percent Change GTE 10%
IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The P Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

It's interesting to note that P implied vol tends to trade above the short-term historical realized vol. As of today however, that vol difference has reached a new high. Specifically:

IV30™: 128.15
HV20: 90.51

We can see the stock had been rising several days in a row, going from $10.05 (9-22-2011) to $14.65 (9-30-2011), or 46% in eight calendar days. The stock has since dropped nearly 20% in the last two trading days. In English, yeah, you can make an argument that the vol should be elevated.

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

The skew shape for both front two months looks "normal." What we can see is that the front month (red line) is elevated to the second (yellow). Oct vol is priced at 136.70 (up 10.8 vol points today) with Nov priced at 123.11 (up 8.1 vol points today).

Finally, let's turn to the Options Tab for completeness.

Possible Trades to Analyze
P has been bouncing around and does tend to move in trends -- up several days or down. The 52 wk range is [$9.33, $26.00].

Prior to today, the IV30™ high was 121.63.

1. Sell downside in Oct
a. With Oct elevated to Nov, and the IV30™ at a new all-time high, one position to examine could be selling the downside puts. Keeping in mind the all-time low for the stock is $9.33, perhaps selling the Oct 8 or 9 puts is one to analyze.

b. A different twist to (a) could be a 1x2 put spread -- like buying the Oct 10 puts and selling the Oct 9 puts on a 2:1 ratio. This reduces the net premium received, but allows for some downside movement in the stock to be captured in the put spread, before getting naked short downside risk.

2. Sell delta neut vol
Selling the ATM straddle or strangles and covering with further OTM strangles seems like a reasonable position to analyze; just recall that the vol is elevated for good reason, the stock has moved huge of late.

This is trade analysis, not a recommendation.

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