Monday, January 6, 2014

GOGO - Volatility Rising, Skew Shifting to Upside; Is GOGO About to Move-Move?

GOGO is trading $24.07, up 0.7% with IV30™ popping up 10.1%. The LIVEVOL® Pro Summary is included below.

Provided by Livevol

Gogo Inc is a holding company. The Company operates through its two operating subsidiaries, Gogo LLC and Aircell Business Aviation Services LLC. The Company provides in-flight connectivity and wireless in-cabin digital entertainment solutions.

I found this stock using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol.  But there is also a compelling skew story here.  In general, the option market reads that GOGO is ready to move-move.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20™ GTE 10
HV180™ - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

The GOGO Charts Tab (~7 months) is included below. The top portion is the stock price, the bottom is the vol (IV30™).

Provided by Livevol

On the stock side we can see a very nice price appreciation since IPO, with the stock moving from a close of $16.00 to now ~$24 (or ~a 50% rise in less than a year).  We can also see that at one point the stock saw much higher levels, with an all-time high of $35.77.

But this is a vol note, on two-levels, so let's start with the IV30™ chart in isolation, below.

Provided by Livevol

We can see a rather obvious trend in the IV30™... basically, up.... As of right now, the implied in GOGO is near an all-time high, or in English, the option market reads: "Risk Ahead."  Much of that may be due to earnings, but the trend is not just earnings.  The blue "E" icons represent earnings dates in that chart and we can see the upward trend persists in between those cycles.

But there's something even more compelling going on in GOGO volatility, and we can only see it in the skew.

Below I have included the Skew Tab from exactly one-month ago, and then below that, from today.

Provided by Livevol

Provided by Livevol

Note how the right side of the Skew Chart for 1-6-2014 (the out-of-the-money or OTM) shows higher volatility by strike price than the at-the-money options.  That's actually unusual or "abnormal" skew.  When we look at the skew for 12-6-2013 (a month ago) we can see that the shape is in fact the opposite -- with the OTM puts priced to higher volatility than the at-the-money (ATM) options.

So what?  In English, there is a slight paradigm shift as to how the option market reflects risk for GOGO.  Specifically:

1. It's riskier right now than it has been.
2. There seems to be more upside risk (potential) than downside.

Look for earnings dates, as this can occur with that event.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

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

Provided by Livevol

Across the top we can see the monthly vols are priced to 89.93% for Jan and 93.75% for Feb.  That elevated Feb to Jan vol kind of suggests that earnings are not due out in the Jan expiry for GOGO, therefore that upside skew shape is also not due to earnings.

Hmm... A move to come or just elevated volatility?...

This is trade analysis, not a recommendation.

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  1. Ophir, it certainly looks like the skew indicated elevated volatility and certainly not upside risk (or certainly not low downside potential), as it has dropped more than 10% now.

    Can you update this post with your current thoughts? It could still be a case of "Wait-for-it" for all I know.



  2. Hi ricster,

    Thank for your note. The Skew looks pretty similar today as it did in the original post. Just be to be clear, I wrote:

    "As of right now, the implied in GOGO is near an all-time high, or in English, the option market reads: "Risk Ahead."

    GOGO is
    1. It's riskier right now than it has been.
    2. There seems to be more upside risk (potential) than downside.

  3. Thanks for the reply Ophir.

    I see 6200 Feb $21 Puts were bought at the end of the day. I guess that changes the skew & means more volatility (and downside risk) ahead?

    Appreciate it!

  4. Hi ricster,

    30-day Volatility closed today at 90.06% which is up 7.7% on the day, but a tiny but lower than the vol in the original post (look at the top it read: 92.08%).

    The Skew actually looks more extreme to the upside now, believe it or not. I have posted a snapshot of it here:

    Either way, GOGO is reacting as the option market reflected. Not equilibrium...