Monday, May 19, 2014

* Splunk (SPLK) - Stock Collapsing; Risk Exploding: Earnings Preview Points to Unprecedented Risk

SPLK is trading $43.81, up small with IV30™ up 9.3%. The Symbol Summary is included below.

Provided by Livevol

Splunk Inc. (Splunk) provides a software platform. Splunk’s software collects and indexes data regardless of format or source, and enables users to search, correlate, analyze, monitor and report on this data, all in real time.

As of this writing, the hedge fund is naked short SPLK shares.

UPDATE 5-30-2014
SPLK is tumblong after earnings. The Symbol Summary from today and yesterday's close are included below, respectively.

Provided by Livevol

Provided by Livevol


This is a stock and volatility note - a rather remarkable one.  Let's get right into it...
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

We can see an absolute collapse in stock price from $106.15 on 2-28-2014 (earnings) down to ~$44 today.  We're talking about  ~70% in ~12 weeks.  Yikes...

As the stock collapsed, the implied volatility (risk as reflected by the option market) has exploded to new annual highs.  Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

We can see how the implied vol dropped right after earnings (totally normal) down to ~43% and is now back above 74%.  So, in English, as the stock has dropped 70%, the risk as reflected by the option market has risen about the same amount (~72%).

Earnings are due out on May 29th (after the close) for SPLK, and I see no reason for the implied volatility not continue to rise into that event unless there is some sort of pre-announcement.  As of right now, SPLK is at an annual high in risk (implied volatility) and I think it will break a multi-year high (77.45%) ahead of earnings.

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

Provided by Livevol

The skew is pretty normal looking, which is disconcerting for longs -- the option market does not (yet) reflect two-tailed risk into earnings, rather greater downside risk than upside.  That skew shape could (should?) shift as we approach that May 29th date.

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

So, this is early, but let's see how the option market is pricing the stock range:

Using the $45 strike price straddle, the option market reflects a price range of [$37.20, $52.80].

  • 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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