Wednesday, March 19, 2014

Guess? (GES) - Earnings Preview: Astonishing Volatility Development Bends to Order Flow; If You Trade Options, You're Trading Volatility. Whether You Mean to or Not.

GES is trading $28.81, down 1.6% with IV30™ down 2.1%. The Symbol Summary is included below.

Provided by Livevol

This is an earnings preview, volatility and order flow note.  GES reports today after the close.  But really this note points to one stark reality:

If you trade options, you're trading volatility.  Whether you mean to or not.

Let's start with the Options Tab, below.

Provided by Livevol

I note two phenomena:

1. Check out that open interest (OI) in the Mar 30 calls.  That is long interest and it opened yesterday.  So, someone either put on a spec bet for earnings, or is hedging a short stock position -- but in either case, it is earnings related.

2. As always, the volatility in the front month when it turns into "two day" options, with earnings is extraordinarily elevated to the back month(s).  No surprise there.  But, it's the level of the elevation that is rather interesting.

Check this out:

The Mar $29 strike calls are quoting: ~$1.18
The Apr $29 strike calls are quoting: ~$1.38

The Mar $30 strike calls are quoting: ~$0.75
The Apr $30 strike calls are quoting: ~$0.98

The Mar $31 strike calls are quoting: ~$0.48
The Apr $31 strike calls are quoting: ~$0.65

Let's turn to the Skew Tab to visualize that volatility difference.

Provided by Livevol

So, obviously Mar expiry, which is actually just a couple days worth of options, is elevated.  But, note that upside bend to the calls.  Here's an easier way to see it by isolating Mar.

Provided by Livevol

That upside tilt is "abnormal" and is a result (in my opinion) of the heavy order flow in the Mar 29 and 30 calls.  Apr on the other hand does not have that upside tilt.  We can see that easier here:

Provided by Livevol

It's that skew phenomenon that has those call prices so out of whack (i.e. mar is priced so closely to Apr in actual dollars).

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 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 that GES can gap rather abruptly on earnings -- the blue "E" icons represent earnings dates.

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

Provided by Livevol

I've circled the last earnings releases and we can see that all of them have been priced relatively similarly in terms of volatility.  But here's a secret... and it's a big one:

IV30™ excludes the front month options with one week to go before expiry.  So what we see in this chart is that Apr is priced "normally" for earnings, it's Mar that is unusually elevated, particularly in the out-of-the-money (OTM) calls.

Earnings out in a few hours... We shall see what happens.

This is trade analysis, not a recommendation.

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