optionvol-NBC-Bay-Area

This was originally posted on Wednesday, September 7, 2011 and is now a case study in a three part series on option skew. You can read parts one and two by clicking on the titles below.

Part1: Understanding Option Skew -- What it is and Why it Exists

Part2: Trading Option Skew

VRSN is trading $34.76, up 8.4% with IV30™ up 5.2%. The LIVEVOL® Pro Summary is below.



VeriSign, Inc. is a provider of Internet infrastructure services. It provides domain name registry services and infrastructure assurance services.

The stock has been popping of late on takeover spec. Here's a quick news snippet from Forbes.com written by Eric Savitz.

---
VeriSign shares are trading sharply higher for a second straight session after the company cancelled an appearance yesterday at a Citigroup technology conference.

ThinkEquity analyst Daniel Cummins reports in a research note that the company also cancelled a planned presentation at a technology conference his own firm is holding next week.

Cummins says he thinks the cancellations likely have more to do with the company’s CEO search than to potential M&A developments. He points out that the company since August has been run by Chairman and co-founder Jim Bidzos, who took over after former CEO Mark McLaughlin left to take the top job at Palo Alto Networks.

On the other hand, he also contends the company could make a good acquisition target.
Source: Forbes.com -- Update: VeriSign Rally Extends As Rumor Mill Heats Up
---

Well there you go. Takeover... Rumor... Again...

Let's turn to the Skew Tab and check out what is a very cool term structure and skew.



We can see a marked upside bid skew in Sep as the takeover rumors have pushed vol (and the stock) in the OTM calls. I've included the Skew Tab snap from 9-2-2011, below.



Awesome skew shape transformation. We can also see, when comparing the two time periods, how large a vol diff has opened up between the front month and the back two. Specifically, the Sep 36.25 calls are priced to 74 vol while the Oct 36 calls are priced to 47 vol. Said differently, Sep is 57% more expensive (in terms of vol) than Oct, and we're actually comparing a further OTM call in Sep.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



We can see the stock rise of late. On 9-2-2011, VRSN closed at $30.01. As of this writing, it's up nearly $5 or 16%. On the vol side we can see that the short-term historical has been trading above the implied for a few weeks -- starting with the stock drop in early Aug. The short-term implieds and historicals are all sort of converging at around 50 while the long-term realized trend is substantially lower. Specifically:

IV30™: 50.74
HV20: 53.35
HV10: 47.86
HV180: 27.19

Finally, let's look to the Options Tab (below).



This is trade analysis, not a recommendation.

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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 disclaims 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.

The US markets are up again today and the VIX is down, adding to a remarkable year of positive stock returns and reduced implied risk. The Indices snapshot is included below.


Provided by Livevol

The question I'd like to address in this note is whether or not we are in a stock market "bubble."  Of course, you know before even reading the rest of this post that I don't know.  But, I'm going to provide some pretty strong arguments that we are and that we are not.

Let's start simply with facts.  I have included the annual charts for the NASDAQ and S&P 500, below.

Provided by Livevol

We can see greater than a 35% return in NASDAQ and nearly 30% in the S&P 500.  So, bubble or not, the market is up huge this year. I have included the annual returns for the S&P 500 index since 1980, below.


Source: http://www.1stock1.com/1stock1_141.htm

I have marked in green 1995 and 1997, the only two years in the last 33 years that have seen higher returns in the S&P, although this year very well may surpass both of those years when all is said and done. I also note that for both of those years (1995 and 1997), the market was up huge again the following here.

Finally, I have included a two-year return chart of the VIX spot, below.

Provided by Livevol

We can see that the VIX (the "fear index") is down ~65% over the last two-years.  So, either complacency has set in, or, we are literally in a less volatile (less risk) period.

OK, those are the facts, let's get into bubble arguments (pro and con).

Argument: We are in a bubble
Below I have included several snippets from articles that point to a conclusion that the market in general and the technology sector in even greater specificity is in a bubble.

---

Source: TheStreet.com via Yahoo! Finance; Fed-Induced Equity Bubbles Appear Ready to Pop, written by By Richard Suttmeier.

NEW YORK (TheStreet) -- [] The Dow Industrial Average set a new all-time high at 15,797.68 yesterday, which followed a new all-time high for the Dow transportation average set at 7131.80 on Monday. The latest all-time high for the S&P 500 was set at 1775.22 on Oct. 30 with the Russell 2000 matching that feat on the same day with an all-time high at 1123.26. The Nasdaq set its latest multi-year high at 3966.71 also on Oct. 30.

[] [T]he ValuEngine valuation warning reached its severest 2013 levels on Nov. 6 when 83.3% of all stocks were overvalued, with 53.3% overvalued by 20% or more. This was partially caused by the rise in the yield of the 30-year Treasury bond to 3.75%.

[] Note that 15 of 16 sectors were overvalued by double-digit percentages. We showed that 12 sectors were overvalued by 21.6% to 28.1%. The year to date gains are indeed impressive as are the gains over the last 12 months, but note that the P/E ratios are extremely elevated between 17.12 and 30.66.

After monthly benchmark revisions to ValuEngine data two interesting changes have occurred this morning. All 16 sectors are now overvalued as the basic materials sector shifted to 6.65% overvalued from 3.67% undervalued. The most overvalued sector is now multi-sector conglomerates at 31.07% overvalued vs. 25.47% on Nov. 6.
---

The title of the article certainly summarizes the position argued.  Certainly it is a fact that the S&P 500 and Dow Jones Industrial Average are at all-time highs. No argument there.

Key phrases from above:
"83.3% of all stocks were overvalued."
"All 16 sectors are now overvalued."

But, there's more... a lot more...

---
Source: Business Insider via Yahoo! Finance; Here's The Evidence That The Tech Sector Is In A Massive Bubble, written by Jim Edwards.

Here's the evidence that we're in a new tech bubble, heading for a crash, just like the dot com bust of 1999.


Fred / Think Progress

Before we get into specific evidence that the tech sector is inflated, it's worth restating the macro-economic context: Interest rates are basically at zero and have been for some time. When borrowers are paying close to zero interest on loans, that makes money cheap to get. This chart shows the Fed's target rate for interest since 1970.

The stock market is at a peak, which is exactly what you'd expect in a zero-interest environment.


Yahoo Finance / Jim Edwards

We've had five years of solid growth in stocks. People who have invested in stocks in the last five years now feel very, very rich. What could possibly go wrong?

[]

High stock prices and corporate giants who are rich with cash and need to invest it, PwC says. It's not just tech asset prices that are high. Salaries are high, too.
While unemployment generally may be high, in the tech sector it is very low.

Tech companies, led by Mark Zuckerberg at Facebook, are lobbying Congress to relax immigration rules so they can hire more foreign talent because they believe domestic talent has gotten too scarce and too expensive. It's driving up wages bills like crazy. Matt Allen, a tech recruiter at Vertical Move, told me recently:

We're experiencing first hand greater insanity than the dot-com days when Interwoven Software was pulling out BMW Z3's for engineers who joined. Instead, we're seeing sign-on bonuses for individuals five-years out of school in the $60,000 range. Candidates queuing-up six, eight or more offers and haggling over a few thousand-dollar differences among the offers. Engineers accepting offers and then fifteen minutes before they're supposed to start on a Monday, emailing (not calling) to explain they found something better elsewhere.

[See article for several specific examples]

Timothy Draper is the founder of Draper Fisher Jurvetson, a venture capital outfit that has invested in dozens of tech startups. He's been around since the days when Hotmail was the big new thing. He recently told The New Yorker that he believed tech venture capital may have reached the top of its cycle:

“I’ll draw you the cycle,” he said, taking my notepad and pen. He scrawled a large zigzag across the page. “This is a weird shark’s tooth that I kind of came up with. We’ll call it the Emotional Market of Venture Capital, or the Draper Wave.” He labeled all the valleys of the zigzag with the approximate years of low markets and recessions: 1957, 1968, 1974, 1983, and on. The lower teeth he labeled alternately “PE,” for private equity, and “VC,” for venture capital. Draper’s theory is that venture booms always follow private-equity crashes. “After a recession, people lose their jobs, and start thinking, Well, I can do better than they did. Why don’t I start a company? So then they start companies, and interesting things start happening, and then there’s a boom.” Eventually, though, venture capitalists get “sloppy”—they assume that anything they touch will turn to gold—and the venture market crashes. Then private-equity people streamline the system, and the cycle starts again. Right now, Draper suggested, we’re on a venture-market upswing. He circled the last zigzag on his diagram: the line rose and then abruptly ended.

"Abruptly ended"?

Let's hope he's wrong.
---

OK. That article when read fully (not just the snippets does give several examples that draw scary similarities to 1999 and the "Internet Bubble.")

Key Phrase
"Here's the evidence that we're in a new tech bubble, heading for a crash, just like the dot com bust of 1999."

But, believe it or jot, there are arguments, strong ones, that we are not in a bubble, but rather an economic boom.

Argument: We are NOT in a bubble

1. Home prices bottomed out in 2012 and have been rising by double-digits, year over year.

2. Existing home sales — which account for more than 90% of the housing market — are up double digits from last year even after Sep numbers:

"Home sales cooled in September because of higher interest rates, and the recent government shutdown may put a damper on activity for this month, too.

Existing home sales dropped 1.9% in September to a seasonally adjusted annual rate of 5.29 million from 5.39 million in August but were still up 10.7% from last year, the National Association of Realtors said Monday.

The decline was expected, given higher rates and rising home prices that pushed affordability to five-year lows, says Lawrence Yun, NAR chief economist."

Source: USA Today September existing home sales fall 1.9%

Ophir's Note: New Home Sales are starting to paint a different picture.

3. Unemployment is dropping.


United States Dept. of Labor

Here is the data in numbers, rather than a chart (same source):


United States Dept. of Labor

While there are good arguments made about (1) the "real unemployment rate" (adjusted for discouraged workers that leave the work force) is much higher and (2) the "quality" of jobs being created are poor and do not provide livable wages, the bottom line is, massive amounts have jobs have been created (of whatever kind).

Bigger point: There is room for this economy to grow since the long-term trend is closer to 5.5% unemployment.  That would mean we are not in a bubble (a peak), but actually in the midst of a continuing recovery.

OK.  That's it.

Now you decide.  Are we in a bubble or not?

My opinion... bubble -- no, overheated stock prices, yes, but they aren't ready to pop.  Not yet.  But what the hell do I know...seriously, what do I know?...

This is trade analysis, not a recommendation.

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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 disclaims 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.

NCR is trading $34.60, up 2.5% with IV30™ up 5.4%. The Symbol Summary is included below.


Provided by Livevol

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.  But there is even more to this story, a curious skew shape divergence which exponentiates the calendar diff to the upside.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's start with the Skew Tab, below.

Provided by Livevol

We can see two phenomena here:
1. The red curve (Nov option volatility) is above the yellow curve (Dec option volatility) for all strike prices.

2. The red curve (Nov options) show a distinct bend to the upside, which means the out-of-the-money calls (OTM) are priced higher than the at-the-money (ATM) options and the OTM puts.  In English, the option market reflects a substantially higher likelihood of an upside move in NCR stock price in the near-term (the next eight calendar days) than it does in the medium-term (December expiration).

The result is a large widening of the volatility difference (the space in between the two curves) to the upside.  For the record, the current shape of the Nov (red curve) skew is "not normal."  To read about option skew, what it is and why it exists, you can read the post below by clicking on the title:

Understanding Option Skew -- What it is and Why it Exists

Now we can turn to the two-year Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

We can see that NCR has climbed from $18.29 to $34.60 in two years, so a ~90% rise.  But, let us also note that the last earnings release showed a significant stock drop (the blue "E" icons represent earnings dates).  The stock fell from $40.53 to $36.25 in a single day.  So, we have a stock with a longer-term track record of remarkable equity performance, a short -term track record of disappointing earnings, more risk in the immediate-tem (Nov options) than the intermediate-term (Dec options), and finally, a higher probability of an upside move in Nov than Dec.

Finally, let's look to the Options Tab (below).

Provided by Livevol

Across the top we can see the monthly vols are priced to 50.90% and 37.88% for Nov and Dec respectively.  But, that ~13 vol point difference opens up to 22 vol points when you examine the OTM calls (like the Nov/Dec 40 call spread volatility difference).

Let's see if the next eight days do in fact prove to be volatile and to the upside for NCR, or if this is nothing more than noise.

This is trade analysis, not a recommendation.

Follow @OphirGottlieb

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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 disclaims 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.

There’s something that’s not quite right –
There’s one thing that remains my endless fight.

Touch me, feel me, push me around –
But don’t just stand there while I lie on the ground.

I taste your blood stained grin dripping with ache –
You circle me defenseless barely awake.

Take me with intensity and rage –
Do with me what you want just free me from my cage.

How can you fear me I lie alone –
My mind tattered and body stuck in stone.

Rise above me once and for all –
You have your chance to cause my fall.

Now your apprehension and suspense makes me question –
Can you not read my lifeless expression?

But you waited, and now I’ve returned.

Not your pacing and not your stare –
but my awakening and my glare.

Not your imposition and not your will –
but my encumbrance and my thrill.

You left a weakened soldier too long to recover –
You now find something even I could not discover.

Now I am awakened and am ready to war –
My birr returns and my passion once more.

It was not your way that woke me this time –
It was this silly little day and this silly little rhyme.

Buried and lost, left for dead –
Only a moment’s gasp hanging by a thread.

Now you see the improbable return –
Of a warrior’s heart and soul’s burn.

So friend I offer you this one piece of advice –
I say it once and you will not hear it twice.

Step back and caution my howling bay –
I am back from the dead, I am back today.

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GERN is trading $5.68, up 57.8% with IV30™ down 46.6%. The Symbol Summary is included below.


Provided by Livevol

Geron Corporation (Geron) is a clinical-stage biopharmaceutical company developing a first-in-class telomerase inhibitor, imetelstat, in hematologic myeloid malignancies. Telomerase is an enzyme that enables cancer cells to maintain telomere length, which provides them with the capacity for limitless cellular replication.

This is an order flow note, the bad kind...  Someone(s) seems to have accumulated substantial position in Nov calls in a very short period of time just ahead of the news.  And what was the news?...  Here we go:

---
What: Shares of biotechnology company Geron  (NASDAQ: GERN  ) gained as much as 116% this morning after its experimental bone marrow disorder drug helped patients in a study.

So what: In the 18-patient Mayo Clinic study of Geron's imetelstat, 44% experienced clinical improvement, partial remission, or complete remission, triggering plenty of optimism over the drug's blockbuster potential. To be sure, The Street's biotech expert Adam Feuerstein noted that only bone marrow and blood responses were reported -- no clinical or symptomatic responses -- suggesting that Mr. Market might be overreacting to the data.

Now what: Geron will post updated results next month at the American Society of Hematology meeting in New Orleans.

"The current study signifies the potential value of telomerase-based treatment strategies in MF and identifies imetelstat as an active drug in that regard," the study's abstract reads. "The association between response and spliceosome mutations suggests a broader application for the drug in myeloid malignancies."

Source: The Motley Fool via Yahoo! Finance; Why Geron Shares Doubled, written by Brian Pacampara.
---

OK, now the order flow.  First, the Stats Tab demonstrates that over the last 90 calendar days (or ~66 trading days) GERN has averaged 3,162 calls traded a day.  Keep in mind that the average is skewed by the numbers I am about to reveal.  The true average is closer to ~2,000 calls traded per day.


Provided by Livevol

The first trade that caught my eye was a Nov 3/5 call spread purchased on 9-27-213 in the Nov options (not the Oct options).  I have included the Time & Sales Tab on that day for the Nov 3 and Nov 5 calls looking at trades greater than 100 contracts and 50 contracts, respectively.


Provided by Livevol



Provided by Livevol

So we see that 4,285 Nov 3 calls traded, 3000 of them bought for $1.05 against a sale of 3,000 Nov 5 calls @ $0.25.  So, the total call spread was purchased for $0.80, while another 1,000+ Nov 3 calls were bought naked for ~ $0.95.

Keep in mind, the true daily average is ~2,000 calls per day, so just the Nov 3/5 call spread (6,000 contracts) was 3x the total daily average volume, not to mention the 1,000+ more Nov 3 calls that were purchased.

Next I saw the Nov 4 calls.  We can see nearly 2,000 were purchased on 10-23-2013 for ~ $1.00, below.


Provided by Livevol

When we look at the Options Tab (below), we can see the hugely inflated open interest (OI) numbers in the Nov 3, 4, 5 calls.  I have highlighted the OI on the left of the image.


Provided by Livevol

So how much money was made?  Here it is.

1. 3,000 Nov 3/5 call spreads
Purchased for $0.80
Worth today: $1.80
Gain = 3,000 * 100 * $1.00 = $300,000 on a $240,000 bet or a 125% gain (225% of original investment) in six weeks.

2. 1,888 Nov 4 calls
Purchased for $1.00
Worth today: $1.80
Gain = 1,888 * 100 * $0.80 = $151,040 on a $188,00 bet or an 80% gain (180% of original investment) in three weeks.

3. The rest of the Nov 3, and 4 calls
See that OI in the Nov 3 and 4 calls: 7,787 and 7,149, respectively.  That is long interest and combined reflect more than a million dollars in gains above and beyond those already recorded in the other trades.

4. There was a ton of short interest in the puts (sellers).

So what?

Is it possible someone just took a bet on GERN and got lucky? Yeah, sure it is.

Is it possible someone had inside information on GERN and stole money from the rest of the market? Yeah, sure it is.

Couldn't this just be speculation on a known event? yes. But...

I am referencing bets placed six weeks prior, which is very rare for speculators. When an event like this has a known date, speculators will place bets the day before for several reasons:

1. Theta decay makes the options cheaper (most speculators buy options) so waiting right before the event might be cheaper.
2. Order flow before hand can either tip the hand (as it did here) or bend the skew to make creative spreads much more attractive (this is very common in bio-techs).
3. To protect oneself from buying vega and then having the event delayed (which is also very common in bio-techs). This delay crushes the long option holder as all of the volatility goes away yet the stock moving news doesn't come out.


This is trade analysis, not a recommendation.

Follow @OphirGottlieb

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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 disclaims 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.

TSLA is trading $150.43, down 14.9% with IV30™ down 20.9%. The Symbol Summary is included below.


Provided by Livevol

Tesla Motors, Inc. (Tesla) designs, develops, manufactures and sells electric vehicles and advanced electric vehicle powertrain components. Tesla owns its sales and service network. The Company is engaged in commercially producing a federally-compliant electric vehicle, the Tesla Roadster

This is all about earnings, future projections and a pretty large market reaction. I have written about TSLA before, you can read the prior posts below by clicking on the titles:

8-8-2013: Tesla (TSLA) - Now a $20B Firm Off of Earnings Blow Out; How Wall St. Absolutely Blew It; But I didn't... And I'm Just a Guy...


5-9-2013: Tesla (TSLA) - Earnings Explosion Spectacle Hides Vol Shift -- This is a New Company -- A Paradigm Shift is Complete


5-15-2013: Tesla (TSLA) - May Skew Stays Parabolic; Vol Diff Opens... And Some Stuff You May Not Have Known...


5-29-2013: Tesla (TSLA) - This is a New Company; The Paradigm Shift Continues; Part 3 of 3.


This is an incredible story, really, but let's start simply with the Charts Tab (two-years) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).


Provided by Livevol

The stock has risen from ~$30 to an annual high of over $194 and now down to ~$150.  In that time, TSLA has grown from a  ~$4 billion dollar company to over $18 billion even after the drop today.  There has been remarkable stock appreciation and the demand for their vehicles has literally been insatiable at times.  In fact, TSLA's production capacity is the problem, not demand.  Let's dive into the earnings results with some news snippets, below.

---
Tesla shares are trading down some 10 percent despite reporting a third quarter that saw earnings of 12 cents per share beat by 1 cent and revenue of $603 million beat by $68 million. Further, Tesla reports that its gross margin was 22 percent in the period, nearing its goal of a 25 percent margin by the end of the year; Tesla delivered 5,500 Model S sedans, ahead of its own guidance, though it fell short of some high-flying estimates. The big takeaway from the conference call is that it will be production volume constraints — not demand constraints — that will pose the biggest issues in 2014.

Source: WALL ST. Cheat Sheet via Yahoo! Finance; Tesla’s Strong Quarter Fails to Impress, Office Depot Completes Merger, and 3 More Hot Stocks, written by Justin Lloyd-Miller.
---

I'll repeat a line from the above which is critical: "The big takeaway from the conference call is that it will be production volume constraints — not demand constraints — that will pose the biggest issues in 2014."

Remember that...

Now, onto more news...

---
As weekly production rates continue to improve, and Tesla continues to outperform its own guidance for vehicle deliveries, there's no reason to believe that Tesla's growth story is any different today than it was before the company reported third-quarter results. Despite the Street's emotional disappointment, Tesla's Model S remains a blockbuster, and its global expansion continues rapidly.

The company is still supply limited. In fact, demand doesn't seem to be an issue at all for Tesla. "Demand exceeds supply, despite no advertising, no discounts and no paid endorsements," management said in Tesla's third-quarter letter to shareholders. And investors shouldn't let Tesla's third-quarter sequential decline in North American deliveries worry them, either. Musk explained in the earnings call that reservations in North America were actually up sequentially, as the company constrained North American deliveries in order to fulfill European orders.

Tesla's making enormous progress on its international expansion. With Supercharging infrastructure in Norway already reaching nearly the entire population, Germany is Tesla's next international priority. Tesla says it will have half of the country covered with even faster 135-kW Supercharger stations by March 2014, and have complete coverage by the middle of 2014. Beyond Germany, Tesla expects that, by the end of 2014, "the entire population of the Netherlands, Switzerland, Belgium, Austria, Denmark and Luxembourg and about 90 percent of the population in England, Wales and Sweden will live within 320 km of a Supercharger station," management said in the third-quarter letter to shareholders. In China, Tesla has already begun taking orders, and plans to deliver its first vehicle in the country next year.

Finally, at a 10,000-foot view, this stock is ultimately priced for its more affordable third-generation car, which Tesla CEO Elon Musk hopes will resonate with the mass market -- and nothing in the quarter suggested this story has changed.

Source: The Motley Fool via Yahoo! Finance; Why Tesla's Big Sell-Off Means Nothing, written by Daniel Sparks.
---

Sounds like the same story, right? Demand is booming, production is the issue, or as I called it earlier, insatiable demand. And finall, one slightly different view of the results:

---
Tesla (TSLA) reported earnings yesterday and they were fairly disappointing, especially in the number of cars delivered. Let me start with that, the ugly part.

Tesla delivered "just over" 5500 cars in the third quarter of this year. While their own guidance was for 5000, the market expected well over 6000. Rumors floating on the Internet about their production rates caused some people (me included) to believe the possibility of even more cars delivered.

[]

The reason provided by Tesla for the ugly number was constraints on battery production, which leads us to the next revelation from Tesla. It is considering building "with partners" a gigantic battery factory, the largest in the world. With a final capacity roughly equivalent to the entire world's 18650 production.

Let's move on from the ugly to the bad. For next quarter Tesla gave guidance of "just under" 6000 cars delivered. Tesla started the quarter at 550 cars a week and from some pictures posted from the factory is currently at a level of about 570 a week. Since we are in the middle of the quarter we can assume that 570-575 will be the average for this quarter giving us about 6840-6900 cars produced.

At this rate, unless something changes with ramping up cell production by Panasonic, Tesla might not make 40,000 cars next year. Tesla also did not provide much in the way for 2014 guidance and reserved that for next quarter.

Source: The Motley Fool via Yahoo! Finance; Tesla Results: The Good, The Bad, The Ugly And Some New Predictions, written by Daniel Sparks.
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I'll let you guys read the "good" from that article, but I think we all get the point here. Or do we?

Let's try it in plain English, and please do let me know if you disagree:

TSLA shares are down b/c while the demand for their product is high, they can't keep up with production.

That's it... They didn't hit some weird rumor numbers that were floating around the internet, but that's just... well, rumors and speculation. Now the stock did benefit from those rumors (maybe), and thus the stock drop could make sense. But let's not lose sight of the bigger picture:

This is a firm with demand outpacing production for a $70,000 - $100,000 per unit product.

So, is TSLA a buy? I dunno. Is it a sell... I dunno that either. But I do know that this is a firm with demand outpacing production for a $70,000 - $100,000 per unit product.

I've heard of worse places to be for a company. Haven't you?

Finally, let's turn to Options Tab, below.


Provided by Livevol

Across the top we can see the monthly vols are priced to 62.81% for Nov, 57.45% for Dec and 57.41% for Jan.  The 52 wk range for IV30 is [34.01%, 93.64%] so the current level is in the 43rd percentile.  There is a chance the the implied continues to drop a bit as the stock reaches a new equilibrium (even if it's for the short-term).  Watch the stock price drift on this one... Just as the stock price may have risen too quickly b/c of speculators on "rumors" of production, the stock may fall too quickly on the unwinding of those positions.

This is trade analysis, not a recommendation.

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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 disclaims 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.

AEO closed Monday trading at $15.27, up 0.9% with IV30™ up 2.7%. The Symbol Summary is included below.


Provided by Livevol

American Eagle Outfitters, Inc. (AEO, Inc) is a specialty retailer that operates in the United Sates and Canada, and online at ae.com. AEO, Inc operates under the American Eagle (AE), aerie by American Eagle (aerie), and 77kids by american eagle (77kids) brands. Through the Company’s family of brands, it offers clothing, accessories and personal care products.

I found this stock using a real-time custom scan. This one hunts for elevated vols.  I note that AEO is not only at an annual high, but a multi-year high and truly at levels that are essentially incomparable to the recent past.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 30
IV30™ Percentile GTE 80
Average Option Volume GTE 1,200

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated to its own annual history (at least in the 80th percentile). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), and I want a minimum vol level so I don't pick up any boring ETF’s (or whatever). The stock price requirement helps me identify names that have enough strike prices to trade or spread.

The two-year AEO Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see the stock rise from ~$13.50 to as high as ~$24, and then come all the way back to where it is now trad at $15.27.  Through that rather extreme stock appreciation and subsequent drop, the stock has seen several gaps (seethe yellow highlighted stock moves).  As recently as this August, the stock closed above $20.  But while the stock has been a over, this is all about the implied volatility.

Let's turn to the two-year IV30™ chart, below.

Provided by Livevol

If ever a picture was worth a thousand words... The IV30™ has absolutely exploded of late rising from 32.10% on 10-17-2013 to now 61.43% in about three weeks or a 91% rise.  Also, we can see the peaks in IV30™ with each earnings event (the blue "E" icons represent earnings dates) are considerably lower than the level right now.  So, what's going on?...

I don't actually know, but there are rumors that AEO is a takeover target.  I found an interesting post from Forbes.com and have included a snippet below:

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2)    American Eagle Outfitters AEO +0.93% (AEO) has zero debt and currently is selling at very low multiples, based on enterprise value-to-free cash flow and enterprise value-to-ebitda. The company has a very strong brand name and is currently selling very close to its 52 week low of $13.14. When you consider previous takeover multiples in the retail sector, the incredible amount of free cash flow American Eagle generates (over $400 million last year), and the fact that they have zero debt, almost any private equity company should be interested in this stock. According to analysts, American Eagle is worth at least $20 on a takeover or a 52% premium from its share price.

Source: Forbes.com via Yahoo! Finance - Four Potential Retail Takeover Targets With At Least 50% Upside, written by Bryan Rich, Contributor.
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OK, but then there was this very quick research note from ZACKS:

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Investors have definitely seen some solid trading in American Eagle Outfitters (AEO) lately, leading to gains for some. However, AEO is now in overbought territory thanks to its latest move, as the firm has an RSI value of 70.7. Additionally, American Eagle Outfitters currently has a Zacks Rank #4 (Sell), so if the earnings estimate trend is any guide, a fall might be coming for this overbought stock.

Source: ZACKS via Yahoo! Finance - American Eagle Outfitters (AEO) is Overbought, What's Next?
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OK, well, there you go.  Two totally different opinions, granted the timing of the articles was different (10-15-2013 for the former and 11-1-2013 for the latter).

Either way, something is going on with AEO that has the option market reflecting greater risk next 30 days than it has in the last two-years, and likely much further back than that.  Note that the 52wk low for this stock is $13.14, yet the Dec 12 puts are $0.20 bid.  That's a 63% IV for a stock with the following historical realized volatilities (i.e. the amount the stock actually moved annualized):

HV10™: 31.64%
HV20™: 30.74%
HV30™: 27.66%
HV60™: 33.71%
HV180™: 34.19%

So, in English, over a 10-, 20-, 30-, 60 and 180-trading day period the stock has never realized greater than 35% volatility (annualized) yet the implied volatility for the next 30-days is over 60%.  Something is afoot.

Finally, let's look to the Options Tab (below).

Provided by Livevol

Across the top we can see the monthly vols are priced to 65.54% for Nov, 57.98% for Dec and 53.71% for Jan'14.  I note that AEO has earnings due out at the end of Nov (in the Dec options expiry) yet the Nov volatility is priced above that event.

What's going with AEO? I dunno... But relative to it's realized stock movement and prior implied volatility, it is is in totally uncharted territory.  A big move is priced in... let's see...

This is trade analysis, not a recommendation.

Follow @OphirGottlieb

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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 disclaims 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.