Thursday, May 1, 2014

GOGO - Stock Implodes... Now What? Here's What the Option Market Reads.

GOGO is trading $13.33, down 1.4% with IV30™ up 0.2%. The Symbol Summary is included below.

Provided by Livevol

Gogo Inc is a holding company. The Company operates through its two operating subsidiaries, Gogo LLC and Aircell Business Aviation Services LLC.

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

GOGO is an interesting stock in that it closed its first day trading at $16.00.  The stock then dropped to $9.71 and then absolutely exploded up to $35.77.  Keep in mind, this all happened in a matter of months.   Since then however, the stock has fallen all the way down to the $13 level, below the closing print of it's IPO day.

Most recently GOGO gapped down on this news:
What: Shares of Gogo lost roughly 28% of their value today on news (issued after Monday's closing bell) that dominant wireless telecom company AT&T would launch a competing in-flight Internet connection service by the end of 2015.

So what: AT&T and Honeywell, a major supplier of avionics (the electronics systems used in aircraft and other air- or space-borne systems), will team up to provide 4G LTE service for air travelers by late next year. This will be similar to the airborne Wi-Fi technology Gogo already supplies to the vast majority of commercial aircraft that traverse the United States. Honeywell estimates that its deal with AT&T should result in roughly $1 billion in revenue over the next decade as the partners build out the service. AT&T has declined to project any revenue figures of its own.

Source: Why Gogo Inc. Shares Crashed and Burned Today

That news is particularly troubling to a firm that appears to have a single product focus. Let's turn to the IV30™ chart in isolation, below, which charts the risk reflected by the option market in the stock price moving forward.

Provided by Livevol

It's really remarkable how low the volatility was originally priced into GOGO shares by the option market and then how steadily it rose.  usually we expect much higher initial volatility on IPO, and then a lessening of that risk as reflected by the option market as the company begins to report its first, second, etc earnings reports.  That's kinda the standard.  GOGO however, has certainly not been "standard."

Keeping in mind that the implied volatility reflects the future risk in the stock price (by options), we can see a few phenomena above, and then one very interesting one below.

1. The implied volatility level of ~60% was just crazy wrong.  It took the AT&T news to prove it, but, come on now, this is a small one trick pony that is growing like gangbusters but with a stock price that was all over the place.

2. An implied volatility of over 90% likely won't persist unless there is other news to keep the risk that high.

Now let's turn to the Skew Tab snap (below) which illustrates the vols by strike.

Provided by Livevol

GOGO shows a parabolic skew, reflecting both upside and downside tail risk coming into earnings on 5-12-2014.  Parabolic skew is "abnormal" under calm conditions, but actually quite expected under circumstances like this.

The takeaway:  The option market does reflect two-tailed risk into earnings -- an unexpected earnings report could catapult the stock substantially lower or higher.

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

It's a little early to price earnings moves, but just for the record (we'll look again ~May 10th), the $12.5 strike straddle in May prices a stock price range of [$10.40, $14.60].

  • 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.

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