Wednesday, August 13, 2014

* King Digital (KING) - Stock Implodes on Earnings; Risk May Be Under-priced... Has Been for a While

Share on StockTwits

KING is trading $14.01, down 23% with IV30™ down 29.7% off of earnings. The Symbol Summary is included below.

Provided by Livevol

This is a stock price and volatility note (post-earnings), but also a follow up to an article I posted on 6-30-2014: King Digital (KING) - Stock Rips; Risk Pricing Back to Absurd... Again.

We really haven't seen many public companies with this sort of make-or-break existence as mobile video game companies have... certainly not that have a market cap of $4.5B.

My conclusion for this article is literally a copy and paste from the one in June:
"Like many names I have written about before, the implied volatility in KING (the forward looking stock price risk as reflected by the option market) is just too low for a stock that moves this much... IMHO."

The definitive article surrounding this phenomenon is included below:
How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind.

The all-time stock chart is included below.

Provided by Charles Schwab optionsXpress

Since going public, KING is down ~30%%.  But the news today is earnings:

Shares in the game maker tumbled more than 23 percent in midmorning trading on Wednesday after it announced a disappointing second quarter. Sales came in lower than expected, prompting the company to reduce its performance forecast for the rest of the year.

Not even a $150 million special dividend could lift investors’ spirits. Shares in the company were trading at about $14 as of late morning on Wednesday, valuing the game maker at $4.4 billion.

Source: DealB%k via Yahoo! Finance Candy Crush Maker’s Post-I.P.O. Woes Continue With Tough Quarter, written by MICHAEL J. DE LA MERCED.

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 vol crush after earnings is normal, expected and almost a tautology.  So that's not the issue.  The issue is that this firm lives and dies on fads (like that Kim Kardashian has a new video game that people seem to like more than Candy Crush).

We really haven't seen many pubic companies with this sort of make-or-break existence that have a market cap of $4.5B (as of now), not to mention $6B as of yesterday.

To be clear, I'm not saying this is good or bad, what I am saying is that risk is high and the option market is under-pricing that risk in my opinion.

Rather than speak about price sort of implicitly, we can see the explicit risk pricing in the option quotes.

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 [$12, $16] 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.

My opinion is that KING will trade outside that range at some point before Sep. 19th, but I am not trading on it and I am not giving advice nor am I registered to give advice nor am I soliciting the purchase or sale of any security ever.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

No comments:

Post a Comment