Monday, June 23, 2014

* 3D Systems (DDD) - Whipping Stock Shows Low Risk; A Mispricing and a Major Unknown.

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DDD is trading $56.08, up 5.1% with IV30™ up 7.1%. The Symbol Summary is included below.

Provided by Livevol

This is a stock and volatility note on a stock that is in a precarious position.  The technology realm it participates in is incredible.  But, like all disruptive technologies, there will be winners and losers and it's damn hard to figure out which will be which until it's often too late to profit from.  DDD is in this situation.

DDD has some incredibly high firm specific risk and is growing in part by acquisition which is often not a good sign for a young industry.  Is DDD a huge winner or... not... Three months ago the option market reflected a greater likelihood of upside risk when compared to the downside than it does today. For those that believe DDD will turn back into a stock that moves with great volatility, there is an opportunity right now in the option market.

As I have been writing for quite some time, the risk reflected by the option market is too low, in my opinion. The correlation of risk to the S&P 500 ignores the firm specific risk in several individual names (TSLA, NFLX, TWTR, DDD....).

My definitive pound my chest, soapbox, cry like a baby post on this subject is included below:
NFLX, TSLA, TWTR - How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind.

Now back to DDD: The five-year stock chart is included below.

Provided by Charles Schwab optionsXpress

So the equity appreciation has been (had been) incredible.  Perhaps too incredible.  The stock hit an all-time high of  $97.28 on 1-3-2014. After that peak, the stock dropped all the way down to $43.35 on 4-29-2014, right off of an earnings release.  That's a 55% drop in just under five months.

Since that low, the stock has risen nearly 30%.  So, we can agree there has been substantial stock volatility.

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

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).  We can see that DDD is off of the lows in "risk," but is closer to the low than the high.

English: The risk reflected by the option market is low(ish) relative to the last two-years, but risk is climbing. For those that believe DDD will turn back into a stock that moves with great volatility, there is an opportunity right now in the option market.

The large stock swings and MOMO deflation (for a half a second) have had an impact on the skew. The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

As of right now the skew shape is pretty "normal" looking, with the downside showing more risk than the upside.  What's "abnormal" is a comparison back to DDD's history.

Let's turn back to the Skew Tab three-months ago.

Provided by Livevol

Check out the skew shape here.  This is parabolic, reflecting two-tail risk (upside and downside).

English: Three months ago the option market reflected a greater likelihood of upside risk when compared to the downside than it does today.


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

Using the at-the-money (ATM) straddle in July we can see that the option market reflects a price range of [$49.50, $60.50].

  • 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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