Sky-High Volatility Expectations for Turtle Beach Earnings

Short interest on Turtle Beach has been exploding

Nov 5, 2018 at 1:25 PM
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Turtle Beach Corp (NASDAQ:HEAR) is gearing up to report earnings after the close tomorrow, Tuesday, Nov. 6, and the stock is testing the key 50-day moving average ahead of the event. At last check, this downsloping trendline was located around $20.32, and the shares were trading just below here at $20.21, after trying to push above the moving average earlier in the day. This closely watched technical marker also capped the equity's previous two breakout attempts.

hear stock price

As you can see on the chart above, HEAR stock has been carving out a series of lower highs and lows since the August peak of $34.50, that came right after the last earnings release. On the other hand, the shares recently bounced from the $16 level that is roughly double where they were trading before their massive May bull gap. Even with the recent weakness, the video game headset maker still has a year-to-date gain north of 1,000%.

The options market is certainly expecting a massive post-earnings move for Turtle Beach, with at-the-money implied volatility data pricing in a 27.4% swing for Wednesday's trading. Such a move to the upside would place the security at $25.74, and a sell-off of this magnitude would place it at $14.87. For sure, anyone looking to buy short-term HEAR options would be paying extremely high premiums, based on the 30-day at-the-money implied volatility of 156.8% -- in the 100th annual percentile.

Looking at options activity across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) in the past 10 days, 2,259 calls were bought to open compared to just 1,269 puts, which on the surface would indicate bullish expectations. However, this could be connected to the growing short interest levels on Turtle Beach.

For instance, short interest surged 36.5% in the last two reporting periods, putting an unbelievable 74% of the total float in the hands of these bears. Going by average daily trading volumes, it'd take short sellers almost a week to cover their positions. Considering this, some of the recent call buying could be from short sellers hedging against a huge upside move from the stock.

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