Friday, April 19, 2013 (OSTK) - Stock Rips for Second Day; But this Time, Vol Pops; Takeover Spec May Be the Culprit?

OSTK is trading $18.27, up 16.4% with IV30™ up 19.6%. The LIVEVOL® Pro Summary is below.


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-----------------------------------------------------------, Inc. (Overstock) is an online retailer offering discount brand name, non-brand name and closeout merchandise, including bed-and-bath goods, home decor, kitchenware, furniture, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories, among other products.

This is a vol and stock note on a company that was trading at $11.46 two days ago and is now 60% higher off of earnings (sort of). Let's take a peak at a news snippet from yesterday and then get into the option and vol "stuff."

What: Shares of were going through the roof today, climbing as much as 36% after thrashing earnings estimates in its first-quarter report.

So what: The online retailer, which has struggled to turn a profit against the likes of, posted net income of $0.32 a share in the quarter, up from $0.12 a year ago, and well ahead of analyst estimates at $0.13. Revenue also flew past expectations of $282.3 million, climbing 19%, to $312 million. Gross margin improved by 80 basis points, to 18.9%, and nearly all the revenue gains came from fulfillment partner relationships and growth in order size. Management did not provide comment in the press release.

Source: The Motley Fool via Yahoo! Finance; Shares Jump on Strong Earnings, written by Jeremy Bowman.

What's interesting here is that OSTK popped from $11.46 to $15.70 off of earnings and the implied dropped from 65.99% to 47.66% (which is normal). What's a little "less normal" is that the stock is up an additional 16.4% today and IV30™ is now up nearly 20% to 57%.

Let's turn to the 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).

On the stock side we can see two phenomena:

(1) The stock is now at a multi-year high and has popped on two consecutive days.
(2) The stock does have a tendency to gap off of earnings --check out the moves in stock price with the blue "E" icon (denoting earnings).

Let's turn to a one-year IV30™ chart in isolation, below.

We can see the dip in vol when earnings came out on the morning (BMO) of 4-18-2013. But we can also see the rise in the implied today. This is an odd one -- the news is out (and it's good), the stock had reacted, the vol dropped... OK, that's called a good earnings report. But then today, the stock gapped again, and the vol rose. There may have been some analyst upgrades, but, that's kinda irrelevant after a firm posts the earnings (no offense intended). Something else is going on...

I have included the Skew Tab, below.

The red curve represents May vol and the yellow curve represents Jun. I note the upward sloping OTM call portion of the May (red curve) skew. This upward slope is not "normal" in that OTM calls are normally priced below ATM options. Further, it's unusual for OSTK, which just a month ago showed a downward sloping OTM call skew (which is normal). I gotta say, this second day stock pop and skew shift kinda feels like takeover spec. Founded or unfounded, it just does...

Finally, let's turn to the Options Tab.

Across the top we can see that May vol is priced to 56.51% while Jun is priced to 52.28%. But, look at the OTM call vol difference. The May/Jun 22.5 call spread shows 7.5 vol point diff (compared to a 4 point vol diff for the ATM calendar spread). Again, this feels like takeover spec pricing -- which often (usually) turns out to be nothing. But sometimes... it doesn't...

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