Friday, March 14, 2014

Nuance Communications (NUAN) - Skew Breaks to Upside on Orderflow; Rarefied Air: Price Discovery in Real-time

NUAN is trading $15.83, up 5.9% with IV30™ exploding up 24.9%. The Symbol Summary is included below.

Provided by Livevol

Nuance Communications, Inc. is a provider of voice and language solutions for businesses and consumers globally. The Company's solutions are used in healthcare, mobile, consumer, enterprise customer service, and imaging markets.

This is an order flow, volatility and particularly a skew note -- a pretty compelling one. Let's start with the Stats Tab.

Provided by Livevol

We can see that over 29,000 calls have traded already today with a total daily average of just 7,756.  So, we're at ~4x with two hours to go in the trading day.  The circumstantial evidence that the option trades are purchases is simply that the volatility is rising.  We'll see that in a sec in two different ways.

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 I note some wild gaps off of earnings (the blue "E" icons represent earnings dates).  it's almost comical how little transparency there seems to be from this company and how abruptly the stock moves when that transparency comes forward in one big announcement (i.e earnings).

Two other phenomena to note:
1. The stock was trading at $26.31 two-years ago and is now ~40% lower.
2. The stock hit a 52 wk. low of $13.00 and is now popping off of that low.

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

Provided by Livevol

Here's where the volatility story starts.  We can see the rise of volatility into earnings dates, which is normal.  We can also see the volatility crush after earnings -- also normal.  But, check out the volatility move today.  Look how the IV30™ has exploded today.

The thing about this volatility rise is that the option market is not just reflecting more risk, it's in fact reflecting a risk paradigm change - a rather abrupt one.

The Skew Tab snap (below) illustrates the vols by strike by month.  Let's start with the Skew Tab from 3-10-2014 (four days ago):

Provided by Livevol

Note how the Mar options are priced below Apr (in terms of volatility).  Now let's move to today:

Provided by Livevol

Now see how elevated Mar has become to Apr, and, even more interesting, look how the skew shape has shifted.  The Mar options reflect substantially more upside risk (potential) than downside.  The order flow has, in a sense, broken the skew shape away from "normal."  This can happen with order flow and revert back to "normal" quickly, which may mean a trading opportunity.  Of course, it can also reflect a true (lasting) change in the risk profile.  My best guess is the former.

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 Options Tab is included below.

Provided by Livevol

Check out the volatility by expiry across the top in the green numbers.  We can see that Mar vol is up 21.7 volatility points while Apr is up 6.9 volatility points.  This feels like a momentary shift.  Or... the company will rip higher as it has recently.  In either case, be aware of the skew -- this is price discovery and it happens in the options market with enough time to observe and contemplate, unlike almost any other market.  It's a rather unique phenomenon to equity derivatives.

For more on price discovery you can read my post on the subject here:
Trading Option Skew

This is trade analysis, not a recommendation.

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