Friday, June 28, 2013

Research in Motion (BBRY) - How the Option Market was 'Wrong'; And We Knew It

BBRY is trading $10.75, down 25.8% with IV30™ down 25.4%. The LIVEVOL® Pro Summary is below.

This is the final piece to a there part series on BBRY earnings. It is a beautiful example of how the option market "appears" to have totally mis-priced an earnings event -- one that I was crowing about loud enough that Goldie agreed and sold the idea to their customers a day after we published it.

My first post was on Tuesday 6-25-2013 (see below), then on Wednesday 6-26-2013, Reuters publishde this nice piece:
STOCKS NEWS US-BlackBerry option prices seen too low ahead of results

Read the top story...

Here are the first two articles (click on the titles to read the posts):

6-25-213:Research in Motion (BBRY) - Earnings Approach, But is Vol Too Low? Is Obsolescence Still a Possibility?

6-26-2013: Research in Motion (BBRY) - UPDATE: Earnings Vol Falls Again; What's Going on With BBRY Earnings? Now Goldie Sees it too...

The take aways were simple:
1. The original note surrounded a curiously low vol given the event about to take place on 6-28-2013 BMO (i.e. earnings). See the Symbol Sumary from Wednesday, below:

Note the IV30™ level (78%), then read on...

2. For the prior three earnings releases the IV30™ hit 95.51%, 92.44% and 95.90% respectively for Sep-2012, Dec-2012 and Mar-2013.

3. This is a firm that once dominated its market, now doesn't, was trading dangerously close to penny stock status (in stock price not in market cap) and now we are about to see the future unfold. That is not a low risk event.

4. The Jun28 weekly options priced in a $1.70 move in the ATM straddle

5. The Skew was flat -- which was in fact bullish.

Today, the stock has moved more than 100% greater than that straddle value and the move is down -- a lot.

Bottom line, the option market did reflect too little risk (though this is one outcome of a probabilistic measure so there is no "right" or "wrong.") What is certain is the outcome today -- that the stock moved much more than the options reflected and this was not a surprise... At least not to us...

This is trade analysis, not a recommendation.

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