Monday, June 30, 2014

* King Digital (KING) - Stock Rips; Risk Pricing Back to Absurd... Again.

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KING is trading $20.43, up 14.5% with IV30™ up 23.5%. The Symbol Summary is included below.

Provided by Livevol

This is a volatility, stock and skew note on an IPO that has joined the fray of MOMOs.

Like many names I have written about before, the implied volatility in KING (the forward looking stock price risk as reflected by the option market) is just too low for a stock that moves this much... IMHO.

The definitive article surrounding this phenomenon is included below:
How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind.

The stock chart (all-time) is included below.

Provided by Charles Schwab optionsXpress

The all-time high for this stock is $20.82 and it very well may take that level today or tomorrow or... soon.  What we can see in the stock chart is some pretty extreme price movement. At one point this was also a $15.36 stock.  In the last two-days it has risen from $16.98 to now 20% higher.  I bring this up because the option market seems to have ignored this reality.

Before we get to the option market, I'm just going to drop in an all-time chart for ZNGA.

Provided by Charles Schwab optionsXpress

I know it's a different company, blah, blah, all true blahs... just a chart, that's all. Now.. to the option market.

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 KING has hit a level of over 80% in IV, was just trading at an all-time low in risk... and what do you know, as it hit that low in risk, the stock catapulted 20% higher in two trading days.

But still... the volatility feels low, and we can put numbers to it in a second.  But first...

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

Provided by Livevol

Note that the skew shape is parabolic.  That means the option market reflects two-tailed risk in the stock price.  While that sounds like it should be a normal event, it actually isn't.  That skew shape is "abnormal."

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 [$17.90, $22.10] by the end of trading on July 18th.

Consider that the stock closed at $16.98 on Thursday:

  • 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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