Tuesday, March 11, 2014

GOGO - Earnings Preview: What the Option Market Reads: Tail Risk Elevated, Overall Risk Muted.

GOGO is trading $24.39, down 0.6% with IV30™ down 0.6%. The Symbol Summary is included below.

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The Company provides in-flight connectivity and wireless in-cabin digital entertainment solutions.

This is an earnings preview note focusing on the stock, volatility index and the skew.  Let's get to it...

The Charts Tab (company's full history) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

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On the stock side we can see several phenomena:
1. The stock's opening print was from IPO was $13.20 (7-5-2013). In the last seven months, it is up 85%.
2. The stock hit a high of $35.77, which is 171% higher than the first print and as of now the stock is off that high by 32%.
3. The stock ripped off of earnings in early November 2013 but after that pop, it slid slowly but consistently down to the $18.50 range.
4. Since that low the stock has popped ~33% and has finally found, at least for a few days, an equilibrium pre-earnings of ~$24.

So, the company has been public for less than a year and has seen a rather large range.

Let's turn to the volatility, which is where the story forms. The IV30™ chart in isolation is included below.

Provided by Livevol

Thre is a fascinating trend in the vol -- specifically that it was rising steadily for several months, but all of a sudden in early Feb, that up trend in risk (volatility) has turned the other way.  This is particularly odd b/c earnings are due out in two days.  The earnings event usually increases risk.

The range of IV30™ for GOGO is [50.71%, 101.88%] and right now it sits at ~88%.  I'll tell you what... that feels low.  I don't mean it's a purchase, I mean it's interesting that the risk in this firm as reflected by the option market is dropping.  Very interesting (and quite possibly correct).

But there's yet more to the volatility story, and it lies in the skew. The Skew Tab snap (below) illustrates the vols by strike by month.

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I have isolated the Mar options, although Apr has a similar shape, namely parabolic.  GOGO has had a parabolic skew before, you can read about it here:
GOGO - Volatility Rising, Skew Shifting to Upside; Is GOGO About to Move-Move?

What is parabolic skew?  It's a reflection by the option market of elevated tail risk (upside and downside) and that is unusual to the norm, broadly speaking.

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 is the conclusion about volatility?
The overall volatility level has been dropping -- a reflection of less overall risk in the stock price by the option market.  But, the tail risk (the risk of a "Black Swan or White Swan" large move) is still out there.  In

English: the ATM options are inexpensive relative to the tails on both sides.

Finally, the Options Tab is included below.

Provided by Livevol

As of right now the option market (Mar options) is pricing a range of [$20.50, $27.50] by Mar expiry based on the $24 strike straddle.  Let's see if the options are right... Or let's see if there is a "Swan" move.

This is trade analysis, not a recommendation.

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