Monday, February 10, 2014

Amtrust Financial (AFSI) - Risk into Earnings Explodes to Unprecedented Levels. Is Fraud in Play?

AFSI closed Monday trading at $31.05, down 5.5% with IV30™ up 8.1%. The LIVEVOL® Pro Summary is included below.

Provided by Livevol

Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four business segments: small commercial business, specialty program and personal lines reinsurance.

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.

Ultimately this is an elevated volatility  note into earnings... but this volatility is like no other AFSI has seen -- earnings or otherwise. And it surrounds an accusation of accounting fraud.

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

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

Provided by Livevol

The stock chart is wild, full of massive gaps in the stock including the most recent drop from $41.06 (12-6-2013) to $28.62 (12-18-2013).  That 30% drop was accompanied by a huge pop in the implied volatility from 38.65% to 96.65% or a 150% explosion.  Now that was a multi-year high in the volatility... and then the last few days happened.

Let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

We can see that explosion in the implied during the stock drop, but now the implied has risen even higher, to unprecedented levels ahead of earnings.  The blue "E" icons represent prior earnings dates, and as you can see (I've highlighted them), AFSI has never seen anything close to this level of risk reflected in the options in the last seven earnings cycles (or any other time in the last two-tears).

Just for a point of comparison here are the  IV30™ levels of some other firms you may be familiar with:

TSLA: 80.00%
TWTR: 55.42%
DDD: 65.61%
NFLX: 34.01%

Yes, of course those other firms don't have earnings right now, but at 105.78% volatility, we are looking a big number, not just for AFSI, but for almost any company.  The real question is this:

Is the risk reflected by the option market truly reflective of the risk in earnings, or is it an artifact of the last big move down and volatility pop? Here's a tidbit: The big move down surrounded allegations of fraud. Just let that ring for a sec...

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

Provided by Livevol

Across the top we can see the monthly vols are priced to 132.71% for Feb and 93.06% for Mar.  This little known $2.5B market cap financial is exhibiting huge risk into earnings.  But is it an accurate reflection?... We'll see on 2-13-2014 when earnings come out, but the mere implication of fraud does mean this stock has a heightened risk of a "Black Swan" stock drop. Doesn't mean it will happen, in fact, maybe it already did... but yeah, the risk should be at unprecedented levels.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaims any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

No comments:

Post a Comment