Schaeffer's Trading Floor Blog

Analyst Downgrades: Cree, Inc., Yelp Inc, and VMware, Inc.

Analysts issued bearish notes on CREE, YELP, and VMW

by 10/22/2014 9:36 AM
Stocks quoted in this article:

Analysts are downwardly revising their ratings on semiconductor stock Cree, Inc. (NASDAQ:CREE), business review site Yelp Inc (NYSE:YELP), and IT issue VMware, Inc. (NYSE:VMW). Here's a quick roundup of today's bearish brokerage notes on CREE, YELP, and VMW.

  • CREE dropped 10% right out of the gate -- and to a new annual low of $29.49 -- after its fiscal first-quarter earnings miss and lower-than-expected current-quarter revenue guidance prompted a round of bearish attention from the brokerage crowd. Included in the bunch was a downgrade to "neutral" from "buy" and price-target cut to $31 from $44 at D.A. Davidson, and a price-target reduction to $28 from $42 -- and tepid "neutral" rating -- at Susquehanna. On the charts, CREE has shed 52% year-to-date to trade at $29.77, and should the stock's technical struggles continue, another round of downgrades and/or price-target cuts could apply additional pressure. In fact, four out of 14 covering analysts maintain a "strong buy" rating on the shares, and the equity's consensus 12-month price target of $41.65 sits at a 26% premium to current trading levels.

  • Brean Capital initiated coverage of YELP with a lukewarm "hold" rating and price target of $68.78, ahead of the company's third-quarter earnings report, which is due out after tonight's close. Technically speaking, YELP has made some big moves to both the upside and downside in 2014, but after all is said and done, the stock is sitting on a modest 3.4% year-to-date gain to trade at $71.28. On the sentiment front, option traders have been upping the bearish ante in the weeks leading up to Yelp Inc's quarterly announcement. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.94 ranks just 12 percentage points from a 52-week peak.

  • VMW is down nearly 8% at the open -- following last night's close at $88.19 -- after offering up a disappointing outlook for fourth-quarter revenue. The news prompted a round of bearish brokerage notes, including a downgrade to "neutral" from "buy" at Nomura, and a price-target cut to $86 from $96 at Susquehanna. Today's price move could come as music to the ears of one group of traders; specifically, short sellers. More than 26% of VMware, Inc.'s float is sold short, and would take about 13 sessions to cover, at the security's average daily pace of trading.

permanent link

Buzz Stocks: Tesla Motors Inc (TSLA), 3D Systems Corporation, and Ocwen Financial Corp

Today's stocks to watch in the news include TSLA, DDD, and OCN

by 10/22/2014 9:28 AM
Stocks quoted in this article:

U.S. stocks are poised to continue yesterday's upward momentum, thanks to tailwinds out of Europe. Among the equities in focus, today's stocks to watch are electric vehicle maker Tesla Motors Inc (NASDAQ:TSLA), 3-D printer maker 3D Systems Corporation (NYSE:DDD), and mortgage lender Ocwen Financial Corp (NYSE:OCN).

  • TSLA is slightly lower in pre-market action, on word that Daimler sold its 4% stake in the stock, and that auto-heavy Michigan banned direct sales of Tesla cars. So far in 2014, Tesla Motors Inc shares have added more than 56%, and recently bounced from their 200-day moving average -- a trendline that contained the equity's pullback in early May. Nevertheless, short-term option traders are extremely put-heavy, relatively speaking. The stock's Schaeffer's put/call open interest ratio (SOIR) sits at an annual high of 1.61, implying that TSLA's near-term speculators haven't been more put-biased during the past year. An unwinding of pessimism in the options pits could help TSLA resume its quest for record highs.

  • DDD is bracing for an 11% plunge out of the gate, after the company issued lackluster quarterly sales guidance and cut its full-year revenue forecast. "We are disappointed that we failed to fully capitalize on the robust demand for our direct metal and consumer products during the quarter," said CEO Avi Reichental. On the charts, DDD has surrendered more than half its value in 2014, settling at $43.48 on Tuesday, and today's drop will most likely place the shares in annual-low territory. While bearish sentiment is prevalent for 3D Systems Corporation -- short interest accounts for close to one-third of the stock's total float -- a change of heart among analysts could exacerbate selling pressure on DDD. In fact, seven out of 16 brokerage firms harbor "strong buy" opinions, leaving the door wide open for potential downgrades.

  • Finally, OCN is headed 5.5% lower, as shareholders continue to react to allegations that the company was stacking the proverbial deck against struggling borrowers. The shares of OCN dropped 18% yesterday to land at $21.48, after tagging a two-year low of $18.57 in intraday action, and analysts are adjusting their opinions and price targets accordingly. Moody's and S&P downgraded their credit ratings on OCN, and at least three brokerage firms issued price-target cuts this morning. Among them, BofA-Merrill Lynch slashed its target to $23 from $35 and downgraded Ocwen Financial Corp to "neutral" from "buy." A mass exodus of option bulls could also weigh on OCN. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 50-day call/put volume ratio of 1.68 stands higher than 81% of all other readings from the past year, pointing to a growing bullish bias among option buyers of late. Short-term traders are paying a pretty penny, too, amid heightened expectations for volatility; the stock's Schaeffer's Volatility Index (SVI) sits at an annual peak of 106%.

permanent link

Analyst Upgrades: BlackBerry Ltd, ARM Holdings plc (ADR), and Groupon Inc

Analysts issued bullish notes on BBRY, ARMH, and GRPN

by 10/22/2014 9:25 AM
Stocks quoted in this article:

Analysts are upwardly revising their ratings on smartphone maker BlackBerry Ltd (NASDAQ:BBRY), tech issue ARM Holdings plc (ADR) (NASDAQ:ARMH), and coupon concern Groupon Inc (NASDAQ:GRPN). Here's a quick look at today's bullish brokerage notes on BBRY, ARMH, and GRPN.

  • Macquarie raised its price target on BBRY to $7.60 from $7.25 -- and reiterated its "underperform" rating -- although this new price target still represents a discount to the stock's perch at $10.15. It's been quite a week for BlackBerry Ltd, which has rallied roughly 7%, and back into double-digit territory, amid unconfirmed M&A rumors. Should the stock continue this positive price action, another round of bullish brokerage notes could create a tailwind for BBRY. At present, all 22 analysts covering the shares maintain a "hold" or worse recommendation, and the consensus 12-month price target of $10.15 is in line with current trading levels.

  • ARMH received a handful of price-target cuts following yesterday's poorly received third-quarter earnings results, but UBS bucked the bearish trend by raising its outlook for the shares to "buy" from "neutral," and upping its price target to 980p from 970p, citing signs of resiliency in the company. Year-to-date, ARM Holdings plc (ADR) has surrendered nearly 28% to trade at $39.57, so it's no surprise to see sentiment among option traders stacked up on the skeptical side. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, the equity's 10-day put/call volume ratio of 5.45 ranks in the 89th annual percentile. Simply stated, puts have been bought to open over calls with more rapidity just 11% of the time within the past year.

  • Ahead of GRPN's third-quarter earnings report -- slated for release after the close next Thursday, Oct. 30 -- Brean Capital started coverage of the stock with a "buy" rating. On the charts, the security has performed poorly in 2014, resulting in a year-to-date deficit of 47.2% to trade at $6.22. Against this backdrop, speculators have shown a distinct preference for puts over calls among options set to expire in three months or less. In fact, Groupon Inc's Schaeffer's put/call open interest ratio (SOIR) of 0.90 ranks higher than all other readings taken in the past year, meaning short-term speculators are more put-heavy now than at any other time over the last 12 months.

permanent link

Options Check-Up: Advanced Micro Devices, Inc., Baidu Inc (ADR), and Himax Technologies, Inc. (ADR)

Analyzing recent option activity for AMD, BIDU, and HIMX

by 10/22/2014 8:10 AM
Stocks quoted in this article:

Among the stocks attracting attention from options traders lately are chip maker Advanced Micro Devices, Inc. (NYSE:AMD), online search giant Baidu Inc (ADR) (NASDAQ:BIDU), and LCD expert Himax Technologies, Inc. (ADR) (NASDAQ:HIMX). Below, we'll break down how options buyers are positioning themselves, and how much speculators are willing to pay for their bets on AMD, BIDU, and HIMX.

  • AMD rallied 3.8% yesterday to close at $2.77, but remains 28.4% lower year-to-date. Not surprisingly, option traders have been upping the bearish ante on the stock. Advanced Micro Devices, Inc.'s 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 2.42 sits just 2 percentage points shy of an annual peak. Regardless, those looking to buy AMD options will pay a fairly typical price right now, as the equity's Schaeffer's Volatility Index (SVI) of 72% ranks in the middling 52nd percentile of its annual range.

  • BIDU ended Tuesday 2.7% higher at $222.35, bringing its year-to-date advance to 25%. In the options pits, however, short-term speculators haven't been as put-skewed as they are currently, looking back one year. Specifically, Baidu Inc's (ADR) Schaeffer's put/call open interest ratio (SOIR) -- which measures both buy- and sell-to-open activity -- of 1.02 outstrips all other readings from the past year. Now appears to be a good time to buy (rather than sell) premium on BIDU options expiring within three months, as the equity's SVI of 41% is lower than 62% of comparable measurements taken over the previous 12 months.

  • Finally, HIMX tumbled 7.9% yesterday to end at $8.02, and on a year-to-date basis, the stock's deficit widened to 45.5%. Nevertheless, at the ISE, CBOE, and PHLX, traders have been buying to open calls over puts at a breakneck pace in recent months, per Himax Technologies, Inc.'s (ADR) 50-day call/put volume ratio of 15.69. From a pricing standpoint, the security's short-term options are quite expensive right now. HIMX's SVI of 103% rests just 2 percentage points from a 52-week high.

permanent link

Why Pre-Earnings Options Pricing is So Imprecise

Options pricing on post-earnings moves only gets it right about two-thirds of the time

by 10/22/2014 7:56 AM
Stocks quoted in this article:

Our streak of days with high-profile earnings gaps ended at one yesterday, as Apple Inc. (NASDAQ:AAPL) had a relatively calm reaction to its usual stellar numbers. The options priced in about a $4 move, and the actual opening gap was about half that.

There was a long volatility "win," however, as The Coca-Cola Company (NYSE:KO) -- of all names -- was a serious disappointment. It wasn't the biggest score ever, though, for the options owners. The board priced in about a $1.20 move, and in actuality it gapped down about twice that.

All of which leads me to realize I better refresh what it is we're talking about here.

As we all know, most stocks tend to react to their earnings reports. Options anticipate those gaps via elevated implied volatility (IV). The trick is to estimate the degree of volatility "bid-up" and translate that to expectations about the earnings reaction. But, it's not so simple, as there are other drivers to options pricing. The entire world saw a big volatility bid-up recently, so how can you tell what was Ebola fear, for example, and what was anticipation of earnings?

The answer is that you can't do it with any certainty, but you can make educated guesses. The nearer the option to expiration, the more it's moving in relation to the expectation of a post-news reaction. Conversely, the further from expiration the option, the closer the IV is to the true mean volatility. So, to produce an estimate, you would have to translate the volatility curve into a percentage move in the stock.

Simple, right? Well, you don't really have to do the math yourself anymore, as most trading systems will calculate this number for you. With ThinkOrSwim, for example, you can find the number on the Trade Screen under "MMM."

Let's use AAPL for an example. The MMM was about 4, and the stock was in the 99s. That says that based on the IV curve, the options are pricing in a move of modestly greater than 4% the next day. That number is a standard deviation, so as such, it really says that there's a roughly two-thirds chance that AAPL moves within a 4% range, and a roughly one-third chance that it moves beyond the range.

Obviously, each stock has a sample size of one reaction, so it's best to view them all as one big package of numbers. And, if options are more or less pricing reactions correctly, about two-thirds of the names will settle within range of their expectations, and about one-third will move beyond those expectations and squeeze the options shorts.

Thus, when you see a Netflix, Inc. (NASDAQ:NFLX) and an International Business Machines Corp. (NYSE:IBM) and a KO move way beyond the numbers, it doesn't mean those quoted options numbers were wrong. Rather, it's expected that many numbers will miss -- a full one-third of them, in fact.

It's also unlikely that every given earnings season sees a perfect two-thirds and one-third split -- it's a dynamic process. If names keep missing, options prices will lift on the next batch of earners, and so on, until prices rise enough. And, of course, the same thing happens in reverse if everything is moving in line.

It's also improbable that these reaction estimates are exactly correct. An algorithm can guesstimate how a volatility curve will look after earnings, but it can't guarantee it. Perhaps longer-dated options carried more earnings premium than normal, or less premium, or whatever -- the point is, it's a guideline and not gospel.

Oh, and one final point. It's all a zero-sum game. Just because selling earnings volatility is likely to win two-thirds of the time, it doesn't mean it's going to work. The potential losses on those shorts are open-ended, whereas the wins are defined, as you can't earn more than the premium you take in. One NFLX can wipe out a lot of AAPLs.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


permanent link
1 
2 
3 
4 
5 
… 
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT

Partner Center

© 2014 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242 Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email: service@sir-inc.com

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.

Market Data provided by QuoteMedia.com | Data delayed 15-20 minutes unless otherwise indicated.