Thursday, April 10, 2014

Stratasys (SSYS) - Is Option Market Reflecting too Little Risk in 3D Printing Stocks? Has the Option Market Blown it Again?

SSYS is trading $97.80, down 6.3% with IV30™ up 5.7%. The Symbol Summary is included below.

Provided by Livevol

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 an awesome price appreciation  from below $35 to now ~$98 and recently ~$138.  But, of course, we are focusing on the recent price drop, which is now greater than $40 since January.

But there's more.  And it's all about the volatility.

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

Provided by Livevol

I note two phenomena:

1. The current level of the IV30™ is in the 60th percentile on an annual level, so slightly elevated.
2. Just a few weeks ago the implied volatility hit a multi-year low!  What!?

I have written extensively about how I feel the volatility in the market is too low.  Both in specific (NFLX, TSLA, FB, etc, and in general i,.e. VIX. By all means, please read some of them below, they are very relevant to what I see in 3-D printing stocks.

Netflix (NFLX) - How the Option Market Totally Blew It... And We Knew it a Month Ago. Momentum Stocks are Deflating... Right Now.

VIX - Has the Market Fallen Asleep or Is There Really This Little Risk Right Now?

Google (GOOG) - Risk Explodes to Multi-year Highs; GOOG's Earnings Aren't Just About a Single Company Anymore.

Facebook (FB) - Earnings Preview: Has the Option Market Under-priced Risk?

Back to SSYS... Based on what I've been seeing in the 3-D arena and momentum stocks in general, I just don't accept that the risk (implied volatility) is "middle-of-the road" relative to the last year.  The risk is high, maybe higher now than at any point in the last year, IMHO.  And the option market just doesn't reflect that.  But I'm just a fellow with an opinion... been wrong a lot...

Let's turn to the Skew Tab snap (below), which  illustrates the vols by strike by month.

Provided by Livevol

We can see parabolic skew for both of the expiries (jagged as it may be).  One thing I do agree with here, the option market reflects two-tailed risk as opposed to "normal" skew which does not.

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

Finally, let's turn to some option prices.  The May $95 strike straddle prices SSYS in the range [$82, $108] by the end of May expiry.

If you believe that SSYS 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 SSYS 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.

I am long SSYS straddles in April

This is trade analysis, not a recommendation.

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