Wednesday, January 22, 2014

International Game Technology (IGT) - Risk at Unprecedented Levels into Earnings

IGT is trading $17.95, down 1.0% with IV30™ down 1.0%. The Symbol Summary is included below.

Provided by Livevol

International Game Technology (IGT) is a global gaming company specializing in the design, development, manufacture, and marketing of electronic gaming equipment and systems products, including online and mobile solutions.

This is an earnings preview note with respect to volatility, quite the opposite of NFLX (which I posted yesterday 1-21-2014).  You can read the NFLX post by clicking on the title below:

Netflix (NFLX) - Earnings Preview: "Less Risk in This Firm Now than In the Last Two-Years." Do You Agree? I'm Not Sure I Do.

While I note unprecedented low volatility in NFLX for an earnings release, I note unprecedented high vol in IGT for earnings (or any other time).  Oddly,

The IGT Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see two phenomena, depending on your time horizon:

1. Since summer of 2012, the stock is up more than 60%.
2. In the short-term, the stock has found a sort of equilibrium... before earnings.

But it's the volatility that caught my eye. Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

I have circled the level of the IV30™ for each of the last eight earnings cycles (including today).  It's pretty obvious that the risk implied by the option market today is higher than any time in the last two-years -- earnings or otherwise.

I have included the same chart below, but deleted the "noise" and just left the earnings vols.

Provided by Livevol

Look how elevated that horizontal line is to the rest of the history for IGT.  The option market may be dead wrong, but it certainly screams a message: "The risk in IGT is unprecedented going into this earnings release."

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

We can see a rather distinct upside skew here, which is in fact "abnormal" skew.  The option market reflects both huge risk, and a noteworthy tip to the upside.  All-in-all, a rather clear message.  After this earnings report, we will very clearly be able to say if the option market reflected the appropriate risk.  if the stock moves a lot (especially to the upside, but really in any direction), then yeah, it was right.

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, the Options Tab is included below.

Provided by Livevol

Across the top we can see the monthly vols are priced to 60.3% in Feb (with earnings) and 54.67% in Mar. I note that the Mar vol is also higher than any prior earnings level.  Hmmm.... perhaps the risk in IGT goes beyond earnings?...

This is trade analysis, not a recommendation.

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