Friday, July 11, 2014

* Glu Mobile (GLUU) - Earnings Preview & Wildly Low Risk Pricing. You Gotta See This...

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Note the original post date: 7-11-2014

GLUU is trading $5.85, up 8.9% with IV30™ up 9.5%. The Symbol Summary is included below.

Provided by Livevol

Glu Mobile Inc. (Glu), markets and sells mobile games.

This is a volatility and earnings note, specifically a curiously low volatility note on a stock that has been moving at insane levels.

The risk as reflected buy the option market in GLUU shares into earnings is lower now than in each of the last seven earnings cycles.  The stock is up from ~$2.10 just nine-months ago, or a 178% rise.

The all-time stock chart is included below.

Provided by Charles Schwab optionsXpress

I note three phenomena:
1. The stock is down 52% since going public back around 2007.
2. The stock is up nearly 200% in less than a year.
3. The stock is up 50% in less than two-months.

I'd say that's rather volatile... you?

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). So, in English, the red curve is the chart of "risk."

We can see that risk has been rising of late, which is normal as we approach earnings (note that the blue "E" icons represent earnings dates). But the real story here is much more easily seen if we isolate earnings and ignore the in between dates.  So let's do that...

Provided by Livevol

Now we can see the risk levels (IV30) into each of the last seven earnings cycles and for today.  The peak 'risk' level was ~160%.  The low (for an earnings date) was 91%.  Today we sit at ~85%.

Now, reconsider the last two observations regarding GLUU stock movement.  Here, I'll repeat them:

2. The stock is up nearly 200% in less than a year.
3. The stock is up 50% in less than two-months.

Yeah... so why would a stock that has been moving out of its mind now show low risk into earnings... that is, lower risk than any of the prior seven earnings cycles?

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle for the Aug monthly expiration we can see that the option market reflects a price range of [$4.80, $7.20].

Using the July monthly options (which expire on July 18th), we can see that the option market reflects a price range of [5.50, $6.50]. Note that those options do not include earnings.

  • 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.
One last thing I note... Just look at the option prices for the July 18th $5.5 strike puts and $6 calls. The calls (ATM) are priced at 65.6% volatility or in English, $0.10 x $0.20.  Huh?...

An equal 'huh?' for the $5.5 strike puts priced at $0.10 x $0.15.

This is trade analysis, not a recommendation.

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