Monday, July 21, 2014

* Glu Mobile (GLUU) - How the Option Market Totally Blew It... And We Knew it 10-Days Ago

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GLUU is trading $7.48, up 10.2% with IV30™ up 4.0%. The Symbol Summary is included below.

Provided by Livevol

This is a follow up to an article I posted exactly 10-days ago:
GLUU - Earnings Preview & Wildly Low Risk Pricing. You Gotta See This...

This note is going to sound kind of like "I told ya so," which I know is self serving and also "no one" else serving.  So, let's read it not as that, but as a broader view of what I have been writing about for 3-months.

The Option Market Has Been Totally Wrong and Risk Pricing is Absurdly Low

At the time of that first post 10-days ago, the GLUU Symbol Summary looked like this:

Provided by Livevol

So the stock is up 27.9% and the IV30™ (the measure of risk) is up 19.6%

The conclusion from that post was:
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.

Conclusion Today
The risk malaise in the market is wrong. Yep, that's it. Here are just two articles (four examples) out of dozens:

AAPL: Earnings Review: How the Option Market Blew It... And We Knew a Week Ahead of Time.

How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind. 

The  two-year GLUU stock chart is included below

Provided by Charles Schwab optionsXpress

From the blog 10-days ago:

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% 100% in less than two-months.
4. Today: The stock is up 28% in 10-days

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). We can also see the risk rise since the prior post.

Note that the stock price is rising and the risk is rising

For more on that phenomenon and why it could signal the end of the bull market, you can read this:
NFLX - A Building Block of Nature is Breaking Down & So The Bull Market May Be Breaking Down With It

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

At the time of the first article the risk was so low I simply called it "Wildly Low Risk Pricing." Today, with the risk up 20%, it's not wildly low... but it's still low relative to the recent past.  I do note that earnings are due out on the 30th, so that risk level will keep rising unless a pre-release comes out jumping the gun on the actual earnings release.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$5.40, $8.60].

Last time (10-days ago) that range was [$4.80, $7.20]... Well that was wrong...

  • 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.

I am not implying that buying volatility right now is a good trade.  Actually, I'm not implying anything.  This is not advice.  I cannot give advice. Please don't take anything on this blog to be a solicitation to buy or sell any security ever.

This is trade analysis, not a recommendation.

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  1. options were correct, little movement