Friday, July 20, 2012

OCZ Technology (OCZ) - Takeover Spec Following Bad Earnings Pushes Vol to New Highs; Skew Bends to Calls

OCZ is trading $5.70, up small with IV30™ up 13.9%. The LIVEVOL® Pro Summary is below.


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OCZ Technology Group, Inc. (OCZ) designs, manufactures, and distributes solid-state drives (SSDs) and computer components.

This is a price and vol note in a stock that has seen some abrupt moves in just the last week while vol continues to rise. Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, we can see two gaps, one down and one up in the last several trading sessions. I've included news snippets from those two days, below:

7-11-2012: Stock went down from $5.45 to $4.50 (-%)

(Reuters) - Shares of OCZ Technology Group Inc (OCZ.O) fell as much as 20 percent on Wednesday after the solid-state device maker reported first-quarter results below analysts' estimates.

At least five brokerages, including Piper Jaffray and Needham & Co, cut their price targets on the stock.

The company reported a bigger-than-expected quarterly loss on Tuesday, citing supply chain shortages.

Source: Reuters via Yahoo! Finance; OCZ Technology shares fall on weak results, written by Neha Alawadhi in Bangalore; Editing by Sriraj Kalluvila.

7-19-2012: Stock was up from $4.56 to $5.61 (+%)
(Reuters) - Shares of OCZ Technology Group Inc spiked as much as 21 percent in early trade on a report that larger rival Seagate Technology Plc has offered to buy out the solid-state hard drive maker., a hardware industry blog, reported on Thursday that Seagate is considering acquiring OCZ to boost its solid-state drive (SSD) product portfolio. The website said a deal could be announced as early as next week.

Seagate declined to comment on the report and OCZ could not immediately be reached.

Source: Reuters via Yahoo! Finance; OCZ shares surge on buyout report, written by Sruthi Ramakrishnan.

So there we have it -- poor earnings offset by a takeover rumor. The 52 wk range in stock price for OCZ is [$4.14, $10.15].

On the vol side, we can see how the implied rose into earnings and then fell (both of those phenomena are perfectly normal). Since that initial drop off of earnings, vol has risen again. In fact, the current level is a new annual high with a 52 wk range of [50.75%, 128.07%]. Note by how much the annual high has been breached, today.

The vol picture gets even more interesting when we look to the Skew Tab from today and two days ago. Let's start with today:

We can see how elevated the front month is to the two back months and we can also see an upward bend to the OTM calls in Aug, unlike the other two-months. This is a beautiful illustration that the option market reflects greater upside risk (potential) in the near-term (to Aug expiry) than to the back two months, as well as overall risk (overall vol).

Out of curiosity, I wanted to look at the skew a couple of days ago -- before the takeover rumor. I've included that image, below.

Don't let the colors confuse you -- this chart is Aug and Sep. Note how the two months laid on top of each other just two days ago. While we saw above (the skew chart from today) that the near-term risk reflected by the options is substantially elevated to the medium-term, from the comparison of these two two charts we can see that the takeover spec has been the catalyst to this risk premium shift. In English, the takeover spec has pushed risk (vol) higher across the board, but most notably in the front month, affecting not only the overall vol level, but the upside risk (potential).

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

We can see the vols across the top are 147.06%, 122.66% and 96.44%, for Aug, Sep and Dec, respectively. Noting that the prior IV30™ high (before the takeover rumors) was 119.63% (the last earnings vol), we can see that both Aug and Sep are priced above that high water mark. The spec feels like it has legs -- whether or not anything comes of it, it's likely the vol does "something" soon -- up or down. Of course, the stock may well do "something" soon too. On a broader note, in general takeover spec is a whole lotta nothing. Of course, sometimes it isn't nothing.

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