Monday, July 14, 2014

* Kandi Technologies (KNDI) - How the Stock Moved Wildly & We Knew it Two-Months Ago

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KNDI is trading $17.29, up 17.5% with IV30™ up 9.1%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 7-15-2014 (one-day later)

Provided by Livevol

This is a follow up to an article I posted on May 23rd:
KNDI, TWTR, NFLX - Has the Option Market Under-priced Risk in MOMO Stocks?

At the time of that writing KNDI looked like this:

Provided by Livevol

As I have written literally ad nauseam, the option market is broken right now. It's completely wrong in pricing risk and has presented quite possibly the most opportunistic trading environment in the last decade.  An idea has taken over the market which is that as stocks move up, risk has moved down... forgetting that in an environment like this, upside moves can be just as abrupt as downside moves.

Other examples of this endless train of ridiculous mis-pricings:
How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind.

KNDI is up over 50% in less than two months. While the option market priced a stock price range of [$8, $14] by the end of July expiry (see prior post for that), the stock is now trading $17.29 ($18.81 updated one day later 7-15-2014).

The three-year stock chart is included below (as of 7-14-2014).

Provided by Charles Schwab optionsXpress

While the stock saw that massive dip in stock price, the risk as reflected by the option market was actually dipping (again, see the prior post for that).  I have highlighted in the stock chart the date of the first article where I simply stated that risk was mis-priced (one-way or the other).  It turns the 'way' was up, but either way, I wrote:

With VIX dipping to multi-year lows, several MOMO technology names are also seeing implied volatility (equity price risk in the near-term as reflected by the option market) dipping to lows. KNDI is one of those names, and does beg the question: Is the option market under-pricing risk?

Perhaps the option market has fallen into a correlation malaise, applying the same risk standards across a large body of stocks (like the S&P 500) and has not (necessarily) properly identified risk in individual names.

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).

I have highlighted the level of risk at the time of the first KNDI article, we can see the vol dipped even further until it has finally exploded in the last few trading sessions.

Finally, the Options Tab is included below.

Provided by Livevol

OK, here we go again...
Using the at-the-money (ATM) August expiration straddle we can see that the option market reflects a price range of [$13.10, $20.90] through August 15th.

  • 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 do note that the volatility is substantially higher now than it was for the first post, making the mis-pricing (potential mis-pricing) much less obvious.  But the real question is: Do you believe KNDI is in equilibrium right now?

This is trade analysis, not a recommendation.

Legal Stuff:
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