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If you really look hard enough, you can find some volatility out there. In fact, you don't even have to look all that hard, just smile for the camera.
Yes, on June 26, GoPro Inc (NASDAQ:GPRO) started trading. The IPO went off at $24 -- the high end of the expected range -- but clearly a bargain, as the stock hasn't really come close to touching that level since then. The low tick on Day 1 of public trading was $28.65, and that was a steal too. By July 1, Day 4 of life as a listed stock, GPRO hit a high of $49.90.
And then on Day 7, They Created Options.
It's like 1999 all over again. Facebook Inc (NASDAQ:FB) didn't do this well out of the gate of course … quite the opposite. Twitter Inc (NYSE:TWTR) was better, but still not quite this.
There's one gigantic difference, though, between GPRO and the '90s generation of soaring IPOs. GoPro actually earns money. You can assign a multiple to it … it's in the mid-50s, as per Bloomberg.
How do you price volatility in a stock that has basically doubled in four trading days? Very high.
The "VIX" of GPRO opened in the mid-80s, and then drifted a bit into the mid-70s. There was a time when they waited much longer between IPO and options listing, but the "lag" of a week and the change in GPRO is basically the norm these days. So your guess is as good as anyone's as to how to price the options board. TWTR was the last white-hot IPO, so it's the best guide to what might happen in GPRO volatility going forward. Here's the TWTR stock and implied volatility since listing last November.
That's a pretty big volatility range, basically from the 40s to 100 in about eight months of action, with a couple roundtrips in there. Meanwhile, the 10-day realized volatility in TWTR has typically hovered in the 50s and 60s, with a couple large stock gaps thrown in.
If anything, GPRO has jumped out of the gate with a lot more oomph than TWTR did, so the mid-70s volatility doesn't seem frothy for the front cycles. Over time, the volatility will dip … it always does as stocks and companies mature. January options are quoted at a mid-60s volatility, albeit mostly on wide quotes, so it's too early to see where they settle. Even with the 5-10 point volatility spread, it probably still pays to buy near months, trade your long gamma, and then sell outer months. That's all in theory, though. In practice, the markets aren't tight enough to leg anything yet.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.