Wednesday, April 16, 2014

Illumina (ILMN) - Volatility Explodes to Multi-year Highs Ahead of Earnings. Skew Reverse; Bends Backwards.

ILMN is trading $135.95, up 3.7% with IV30™ up 0.9%. The Symbol Summary is included below.

Provided by Livevol

Illumina, Inc. (Illumina) is a developer and manufacturer of life science tools and integrated systems for the analysis of genetic variation and function. The Company provides a line of genetic analysis solutions, with products and services that serve a range of interconnected markets, including sequencing, genotyping, gene expression, and molecular diagnostics.

This is a pre-earnings note, specifically implied volatility and stock price.  ILMN volatility has just breached multi-year highs and earnings are still six days away (so volatility should rise).

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 two distinct story lines.

1. The stock rose from ~$45 to over $180 in less than two-years.
2. The stock has fallen from $183 to now ~$136 in about six weeks.

This stock drop is abrupt but somewhat in line with the momentum stock bubble deflation we have seen across US exchanges.  I posted an article surrounding this topic recently and have included it below.

NFLX, TSLA - Correlation of MOMO's May Point to Bubble Pop; 3 Things We Should Know

With that stock drop has come a massive rise in volatility, and I'm going to show to more phenomena. Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

Check out that incredible rise in IV30™ from ~28% to now~64%.

So what?  That's just earnings, right?

No actually, it isn't.

The blue "E" icons represent the prior earnings dates, and we can see none of the prior seven earnings releases have seen volatility anywhere near this level.  So, yes, volatility is rising into earnings, but no, this isn't normal -- this is very high risk (implied volatility).

That's vol phenomenon #1.  Here's #2: The Skew Tab snap (below) illustrates the vols by strike.

Provided by Livevol

ILMN shows a remarkably upside tilted skew.  The option market reflects substantial upside risk (potential) when compared to the at-the-money (ATM) options and the downside OTM puts.  This is completely reverse to "normal" skew and is actually different than many of the other MOMO's into earnings.

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

As of today the option market is pricing a stock price range [$114, $156].

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
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