Wednesday, March 26, 2014

Plug Power (PLUG) - Stock Explodes then Implodes on "Misunderstanding"; Bloody Murder!.. Or Just One of Those Things?

PLUG is trading $6.88, down 18.8% with IV30™ down 7.0%. The Symbol Summary is included below.

Provided by Livevol

Yesterday, the Symbol Summary closed looking like this:

Provided by Livevol

So we see a stock up 50% yesterday and down 19% today, with the implied volatility up 33.3% yesterday and down 7% today.

I previously wrote on PLUG on 3-4-2014.  You can read that post here:
Plug Power (PLUG) - Why a Company with $25M in Revenue is up 5,000%

Before I get hate mail and hate tweets (from both sides -- longs and shorts), please be level headed. I say all of that, because what I'm about to say is not about the company or the management, it's about that thing we call a stock price. For anyone reading that has a personal connection to this stock, please remember this is my forum, this is my opinion, if you disagree, just don't read it. I respect that decision. Please respect mine. I have no ax to grind; don't give me one.

Now let's focus on the last few days.  First, I have included the tick chart spanning yesterday and through the first half of today, below.  The top portion is the stock price, the bottom portion is the volatility (Apr monthly vol).

Provided by Livevol

Yesterday PLUG was flattish, until this news came out intraday:

Plug Power CEO: Major deal expected in next two to three weeks
Fuel cell systems supplier Plug Power Inc. plans to announce a new major deal with a large automaker in the next two to three weeks.

Source: MarketWatch

That was market moving news to say the least as the stock exploded up 49% in the last hour and a half of trading.

So why is the stock trading down today?  Here's the news... brace yourself:

Plug Power Tumbles as CEO Says ‘Major Order’ Already Disclosed
Plug Power Inc. (PLUG) shares tumbled as Chief Executive Officer Andrew Marsh said comments about a “major order” were misinterpreted and that the deal had been detailed on March 13.

“I didn’t tell them anything new,” Marsh said in an interview at Plug headquarters in Latham, New York, referring to a discussion with Marketwatch that was reported yesterday. “This is the same order I referred to on March 13.”

Source: Bloomberg

OK, so I think any rational person's first reaction is rather visceral and rather negative.  Considering:

  • The importance of the news
  • The timing of the report:  intra-day (during the trading day)
  • The violent move up over an hour and a half
  • The credibility of the news group (MarketWatch is a Wall St. Journal Company)

An initial reaction of bloody murder is OK. Let it happen.

But, if we revert to our old friend Occam's Razor, let's back off any gut reaction to fraud and just assume that a competent CEO and a competent news group simply had a misunderstanding, just as the news today reported.

On a sidebar, though.  Why didn't CEO Andy Marsh say something yesterday during market hours about this misunderstanding?  Did no one notice the valuation of the firm had increased 50% in 90 minutes?  Anyway...

This does reflect a different phenomenon:  The reaction of PLUG stock (not the company, the stock) to news from the CEO (or any other source) has been a bit absurd.  But there's a reason for it, and that reason is not "stupidity" from the retail pubic.  And here's why.

The Charts Tab (one-years) is below.

Provided by Livevol

Note the vertical-axis is in % gain.  PLUG has been up between 2500% - 4000% in the last year.  It was a $0.16 stock not too long ago, and an $11 stock as well.  It has hit the circuit breakers on the down side twice in March, while also hitting an all-time high. A Citron report claiming it was a "casino stock" and worth $0.50 crushed the shares earlier this month as well.  Citron is a guy, a well respected one, but still just a guy.

No matter your opinion of the company's future, there is no real visibility right now.  The stock catapults up on a disclosure from the CEO of a prior deal, and down on a bearish note from a single person research firm.

The price action, in all fairness, has been ridiculous.  Not that it's up, or that it's down, simply that it's so up and so down so fast so often.  And all of that means risk.  Risk in the option market has a different name, it's called volatility.

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

Provided by Livevol

We can see the vol has moved rather dramatically as well, although it has been pretty steadily over 100%.  We can see the peak at over 200% recently, and the peak over 160% yesterday.  But let's look closer.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

I've included several expiries here to demonstrate a point:  All expiries show parabolic skew.  It's actually a little clearer if I omit the options expiring in two and a half days.

Provided by Livevol

Parabolic skew is "abnormal" for most stocks, but perfectly normal and expected in PLUG.  It reflects highly elevated two-tail risk (up and down).  I'd say the stock market has proven the option market correct thus far.

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

Now let's put some numbers to what the option market reads.  Taking the Apr11 weekly options $7 strike straddle we see that the option market has priced in a range of ~[$5.20, $8.80] by the close on Apr 11th.

If you believe strongly this is the range the stock will hold, then you think the vol is too high.
If you can't decide if the stock will be in that range, then you think the vol is priced correctly.
If you believe the stock will be well outside that range at any point before or on Apr 11th, you think the vol is too low.

What do you think?

This is trade analysis, not a recommendation.

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  1. I am trying to understand vol. How did you come out with the price range (5.20-9.80) ?

    1. The value of the $7 strike is call + put = ~$0.80 + $1.00 = $1.80

      The range is 7 +/- $1.80 = [$5.20, $8.80];

      The $9.80 was a typo (now corrected)

  2. I'd say vol is in the right range because I have no clue where this thing goes. Last night I would have bet on higher for sure. Now I'd say lower for sure.

    Question though...abnormal skew refers to only the call side of the skew curve being parabolic? And I am wondering if other/all "cult stocks" (stocks with very passionate followers on both short and long sides), like PLUG has become, or a TSLA CHTP etc, would tend to have the abnormal skew.

    I love those skew charts. Wish I could get something similar in my accounts.