Friday, July 25, 2014

* Glu Mobile (GLUU) - Earnings Preview: Never Before Seen Risk Malaise in a Wild Stock

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GLUU is trading $7.39, up 5.6% with IV30™ up 2.9%. The Symbol Summary is included below.

Provided by Livevol

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

This is an earnings preview, stock and volatility note on a stock which I have been posting about just recently.

There was a wild mis-pricing in the option market in early July.  You can read that post below, it's relevant to the earnings preview:
Glu Mobile (GLUU) - How the Option Market Totally Blew It... And We Knew it 10-Days Ago

The risk going into GLUU earnings as priced by the option market is lower than any other earnings release in the last two-years while the stock itself has shown rather abrupt realized volatility of late.

In this market, volatility to the upside is as abrupt and risky as the downside.

Let's start with the two-year stock chart, below.
Provided by Charles Schwab optionsXpress

When the stock was trading at ~$5.80 I noted how low the implied volatility was.  Ten days later the stock was trading up 28% and the IV30™ (the measure of risk) was up 20% (see prior post for details).

It just the recent past GLUU has:
  • Move#1: Risen from ~$2 up to ~$5.50 in ~seven months
  • Move #2: Dropped from $5.50 to ~$3.80 in a matter of three months
  • Move #3: Suddenly climbed back from $3.80 to now ~$7.50 in less than two months.
Needless to say, there's enormous risk in the stock and it's a pretty tough sell to convince yourself (or for me to convince myself) that the stock is in equilibrium (i.e. some price that is seen as fair and stable).

It's that wild stock price swinging action that has my eyes on earnings and... this...

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).

In English, the red curve is the risk in future stock price movement. The blue "E" icons represent the earnings dates and I have highlighted in yellow the level of the risk right ahead of earnings.  We can see the level today is below any of the prior seven earnings cycles but one could argue that the firm is more risky now than it has been in any of those prior releases.

So... what's going on?  This is yet another example of the risk malaise priced into capital markets, stocks, futures, commodities, whatever...

So far, this earnings season, these low levels of risk have proven to be semi-accurate, which is to say, some stock have stayed within the ranges reflected by the option market (AAPL, NFLX) some have been right on the border (FB) others have totally blown through them (AMZN).  That actually reflects fair pricing.

Let's look at the real numbers for GLUU.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle for the Aug expiration we can see that the option market reflects a price range of [$5.60, $8.40] by Aug 15th.

Using Sep we see something a bit more interesting (IMHO) with a range of [$5.20, $8.80] by Sep 19th.

  • 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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