Tuesday, August 26, 2014

* Bitauto (BITA) - Stock Rips 550%; Is Option Market Completely Wrong?

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BITA is trading $97.52, up 7.1% with IV30™ up 8.9%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 8-27-2014 (one-day later)

Provided by Livevol

As the rest of this note will touch on, the implied volatility (the forward looking risk in the stock price as reflected by the option market) appeared to be quite low as of yesterday (and today as well).

In one day we see a move of greater than 7% (greater than $8.00) as of the time of the first post.  How does the risk pricing look now?

This is a stock and volatility note on a stock that is up 550% in the last year, 100% in the last six-weeks and 40+% in the last two-weeks to fresh all-time highs essentially every day.

Bitauto Holdings Limited (Bitauto) is a provider of Internet content and marketing services. The Company’s bitauto.com and taoche.com websites provide consumers with up-to-date new and used automobile pricing information, specifications, reviews and consumer feedback

The stock is exploding and when we look to the stock chart we'll see practically unfettered upside moves.  At the same time, this $4B market cap as of today was under $1B less than a year ago and yet... the risk as reflected by the option market has been decreasing.  Huh?...

This story starts with a stock move... Let's start with the Charts Tab (all-time) below.

Provided by Charles Schwab optionsXpress

My hashtag for this chart would be #WTF.

We can see how the price, for whatever reason, has come to life in the last year, six-months, 3-months, one-month, two-weeks, and even today.  It's up more than 550% in a year and looks like a broken seismic meter reading an earthquake that won't stop shaking and growing in magnitude... But it will stop shaking... and it will stop growing...

I'm leery about all Chinese stocks, simply because the circumstantial evidence of opaque accounting is too pervasive to ignore. I even wrote about the Chinese Fraud Epidemic (don't forget the United States had one too: Enron, WorldCom, Tyco, HealthSouth, Adelphia, etc, etc).

So, risk number one is the possibility of opaque accounting, non-transparent business practices, etc.  But that's systematic risk, and the reality is, we have enough firm specific risk in and of itself to question the option market right now.

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.  We can see that the risk (the red curve) has been decreasing in the face of this monumental stock rally. In fact, we nearly hit an annual low three days ago (or whatever).

So as the stock rips higher (abruptly) the option market reads: 'Risk is falling, nothing to see here.'

I'm not buying it... I don't know that the stock will move, I'm not putting any position on, I'm simply observing phenomena and I don't understand why risk would be near an annual low.

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 [$81, $109] by the end of trading on 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.

Interestingly, if we look at the green numbers across the top (the monthly vols), we can see that Oct vol is basically identical to Sep.

So... the option market reads this level of risk for not just the immediate-term, but the intermediate-term as well.

Using the at-the-money (ATM) straddle in October we can see that the option market reflects a price range of [$76, $114] by the end of trading on Oct 17th.

This is trade analysis, not a recommendation.

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