Thursday, March 6, 2014

Adobe (ADBE) - Stock All-time High, Volatility High; Order Flow Huge; Earnings in 2 Weeks

ADBE is trading $69.07, up small with IV30™ up 5.0%. The Symbol Summary is included below.

Provided by Livevol

This is an earnings, volatility and order flow note in a stock that is now at all-time highs with implied volatility at an annual high.

ADBE has earnings due out on 3-18 AMC, so that means in this options expiry.

Let's start with some order flow, and the Stats Tab, below.

Provided by Livevol

We can see today that 21,000+ calls have traded on a total daily average of just 3,263.  And that volume is concentrated in Mar (options expiry), specifically the mar 72.5/77.5 calls.

Let's turn to the Options Tab, below.

Provided by Livevol

Check out the volume in those Mar 72.5 and 77.5 calls; they account for ~16,000 contracts of the 21,000 traded today on the call side.  It appears someone is putting on a rather large call spread into earnings, paying ~$0.80.

But there's more to this... and we need the charts to see it.

The 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

ADBE is now at an all-time high, ripping for the last two-years, up more than 100% in that time.   So, phenomenon #1: A huge call spread traded into earnings that bets on ADBE stock blowing through these all-time highs off of earnings due out in 12 days.

But there's even more... let's turn to the IV30™ chart in isolation, below (one-year)

Provided by Livevol

We can see that the IV30™ is already through that annual high and we still have 12 days to go before earnings.  Of course vol should rise into earnings, but the vol has been rising as the stock has been breaking all-time highs and as the VIX has been dipping.  So why is the vol rising so much, so soon?

Well, when a stock is up this much, earnings becomes a very risky event. The options read, "riskier than anything in the last year."

And there's even one more final piece... The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Check out the shape of that skew for ADBE; the upside calls are now bent up.  The option market reflects parabolic (two-tailed) risk, which is an "unusual" skew shape.

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.

So what do we have in totality?

1. A stock at an all-time high
2. Volatility at an annual high
3. Volatility rising with a rising stock price
4. Huge order flow to the upside
5. A skew bend reflecting two-tailed risk.

So what?...

The option market reads "risk" and the equity market reads "up."  One make sense, the other... I guess we'll see...

This is trade analysis, not a recommendation.

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