Wednesday, May 22, 2013

Rackspace (RAX) - Stock Down 50% on Back-to-Back Earnings Collapses, But What About the Vol?

RAX is trading $38.56, up 1.5% with IV30™ up 7.9%. The LIVEVOL® Pro Summary is below.


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Rackspace Hosting, Inc., is the open cloud company. The Company offers a diverse portfolio of cloud computing services, including public, dedicated and private cloud, and hybrid hosting.

I found this stock using a real-time custom scan. This one hunts for vol gainers on the day. I note this stock actually not so much of the vol pop today, but b/c the vol is so low relative to its annual history while the stock has been cascading lower. So this is a vol pop note on a depressed vol stock.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 30
IV30™ Percent Change GTE 9
Average Option Volume GTE 1,200
IV30™ Change GTE 7

The two-year RAX 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).

On the stock side we can see the abysmal return since the stock hit a multi-year high in late Jan of this year. Since then the stock has fallen from over $81 to now $38.66, or a 52% drop in five months. We can see two large gaps down in that short-time period, both right after earnings releases. I do note that consecutive earnings releases have resulted in a large stock drops.

But then we look at the implied vol (the red curve in the bottom portion of the chart) and note how depressed it is to its own history as well as how depressed it is to the two historical realized vol measures (HV20™ in blue and HV180™ in pink).

I have included the two-year IV30™ chart in isolation, below.

Here’s what surprises me. While it’s normal that vol rises and then falls into and out of earnings, this is not a “normal” situation. The stock continues to fall off of bad news from earnings in the trading following the news and has continued to fall (excluding today) from its $80 high price. The IV30™ is now trading in the 22nd percentile with respect to the last year – in other words, the vol is depressed to its own history. In my mind, the implied is remarkably low given the recent stock movement and uncertainty (i.e. gaps down off of earnings reflect “surprises” = risk).

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

Across the top we can see Jun vol is priced 44.42% and Jul vol is priced to 41.21%, so Jul vol is even lower than Jun. That feels… low, right?... or not?

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