Friday, November 9, 2012

VeriSign (VRSN) - Vol Remains in Explosion Territory... But is it High Enough and Is the Skew Shape Right?

VRSN is trading $41.70, down small with IV30™ up 1.9%. The LIVEVOL® Pro Summary is below.


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VeriSign, Inc. (VeriSign) is a provider of Internet infrastructure services. The Company provides domain name registry services and infrastructure assurance services. VeriSign segment includes Naming Services, which consists of Registry Services and Network Intelligence and Availability (NIA) Services.

This is a vol note, specifically elevated vol after an earnings move. 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 it's pretty easy to see the cataclysm that was the last earnings release. The stock dropped from $46.60 to $39.39 in a day, and then fell to $37.07 the following day. Here's a news snippet from that release:

The big news was that regulators have delayed the review of VeriSign's contract for its domain name registry business. The review was expected to be completed by the end of next month by the Commerce Department, but VeriSign said regulators may not finish on time. That adds major uncertainty in the near-term for what some analysts had considered a "formality."

Source: The Motley Fool via Yahoo! Finance; Why VeriSign Shares Got Hammered, written by Evan Niu, CFA.

Not only did the stock fall, but that news in fact raised risk (read: vol), and has catapulted VRSN's IV30™ to near annual highs. The 52 wk range in IV30™ is [18.77%, 50.63%], putting the current level in the 94th percentile.

The vol level though is even more impressive when we look at a year chart with IV30™ isolated. I have included that below.

This chart makes it so much easier to see how elevated and how abruptly the vol has moved on this news.  Let's turn to the Skew Tab, below.

We can see the monotonic increase in vol from the back to the front with a notable parabolic skew shape in the front reflecting both the potential for upside moves and downside moves. I am a bit surprised that Dec or Jan'13 (or both) don't reflect parabolic skew as well. It seems that while risk is certainly elevated, given the stock drop on the news, there is the potential for a stock rise as well... right?...

Finally, let's turn to the Options Tab.

Across the top we can see Nov, Dec and Jan'13 are priced to 52.46%, 48.84% and 45.90% vol, respectively. There are really two phenomena I note here:

1. The vol seem low given the news and the impending risk of the next announcement -- I mean, look at that stock reaction...

2. Again, the lack of upside skew in the back months is a little... confounding...

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