Thursday, February 21, 2013

EBIX - Stock Collapses; Vol Explodes on Accusations of Accounting Sham. Option Market Says We are not at Equilibrium.

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Note the original post date: Thursday, February 21, 2013

EBIX is trading $14.41, down 24.4% with IV30™ up 125.8%. The LIVEVOL® Pro Summary is below.

Ebix, Inc. (Ebix) is an international supplier of software and e-commerce solutions to the insurance industry.

The news is simple – accusations of accounting fraud. In fact, the term “sham” has been thrown around. Gotham City Research LLC has claimed in a note that the company’s “accounting is Unreliable, Inaccurate, and Incomplete,” its “tax strategy is a sham,” and its stock “deserves to be Halted” per a Barron’s article.

The stock shows up on the elevated vol scan and high option volume relative to average scans (and a bunch of others). But let’s just focus on what happens when news like this comes out – not just on the day of, but what the option market reflects for the future.

Let’s start with EBIX two-year Charts Tab (below). The top portion is the stock price the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

One the stock side we can see that at the lows of the day, the stock is near multi-year support. So, in English, the news as of right now is really really bad. To get a better feel for the vol, let’s look to the two-year IV30™ chart in isolation, below.

We can see that the vol is also elevated to multi-year highs. In fact, the IV30™ was never above 95% in the last two-years and is now trading at or near 120%. So while the equity market says this is bad news at this very moment, the option market reflects higher risk moving forward than we have seen in a couple of years. So, the stock price, according to the option market, is not settled – this is not equilibrium.

Let’s take a look at the Skew Tab.

We can see that while the front three months show identical skew shapes, the vol is elevated from the back to the front monotonically. In English, the option market reflects greater near-term risk than intermediate-term.

Finally, let's look to the Options Tab (below).

Across the top we can see that Mar vol is priced to 127% and Apr is just above 100%. But if we look a bit more closely we can see that the Mar 9 puts are priced to ~$0.30 which is ~170% vol. Keep in mind, the low, even for today, is $14.35, and $9 is… well… a lot lower…

This is trade analysis, not a recommendation.

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