Tuesday, February 4, 2014

Twitter (TWTR) - Earnings Preview: Why is The Option Market Reflecting Lower Risk? Did You Know This... Again?...

TWTR closed trading at $66.32, up 1.6% with IV30™ down 5.5%. The Symbol Summary is included below.

Provided by Livevol

This is a follow up to the article I posted on Sunday which was an earnings preview for TWTR.  You can that prior post below:

Twitter (TWTR) - Earnings Preview: Two Things I Didn't Know. Do You?

The crux of that article noted two phenomena in TWTR volatility which are pretty... weird...

1. Phenomenon number one that I want to point is simply that the vol in TWTR has not been reacting to this upcoming event (it's been flat). But there's a caveat here, and it's a big one, I'm writing this article on Sunday afternoon. It would not surprise me if the vol starts climbing rather abruptly in to Wednesday's close (the earnings date). I would in fact be surprised if TWTR implied does not go back to over 100% before the earnings release.

-- Today: Well, that didn't happen. This flat volatility reaction has actually gone negative of all things.

2. The second phenomenon I want to point out can be seen in the term structure:
Obviously the Feb 7 weeklies are elevated to the Feb monthly vols b/c of earnings -- by the end of trading on Wednesday, those Feb 7 options will represent essentially pure earnings vol and will be even more elevated. So, the fact that the weeklies are elevated to the monthlies is normal and expected.

My curiosity surrounds the size of that elevation.

OK. Let's fast forward to today and start with the Charts Tab. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

We can see a rather substantial price appreciation in the last week (ish) with the stock rising into earnings from $57.91 (1-27-2014) to now $66.32.  That's an interesting turn in sentiment and could have an impact on the stock if the news from earnings is "bad."

Now, let's turn back to the IV30™ chart in isolation, below.

Provided by Livevol

We can see a completely flat vol move into earnings which is very irregular.  I can't remember seeing it in quite some time without some pretty strong extenuating circumstances.  Even more odd is that the volatility actually dipped today.  Huh?...

So, in English, the option market is reflecting that the risk in TWTR today right ahead of earnings is lower than the risk on Jan 3 and pretty much all the way through today.

Finally, the Options Tab is included below.

Provided by Livevol

The $65 strike straddle in the Feb 7 weeklies is worth ~$9.80 to mid-market.  That same straddle is worth ~$11.20 in the Feb monthlies.

I've been banging the drum about how low the volatility has been in the option market and have written in great detail surrounding TWTR, AAPL, NFLX, FURX, NAV and others.  At some point, the option market will prove right, and I in fact will prove dead wrong.  It's gonna happen...

But, right now, it's difficult for me to understand how the IV30™ hasn't moved (or even how it's gone down) into earnings.

Maybe all the news is out?

Maybe there are no more surprises?

Maybe this is absolutely correct

... but maybe it isn't.

Disclosure: I hold a position in TWTR.

But this is trade analysis, not a recommendation.

Do not use my blog as advice.  I do not have a license to give advice nor is this blog intended as it. This is my opinion, and my opinion is often wrong.

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