Ambarella Inc (AMBA): A Lesson in Implied Volatility

Ambarella Inc is down today, despite a fiscal third-quarter earnings beat

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Published on Dec 5, 2014 at 11:57 AM
Updated on Apr 20, 2015 at 5:09 PM

Ahead of last night's earnings report, Ambarella Inc (NASDAQ:AMBA) options flew off the shelves at quadruple the average intraday pace. However, even though the shares have tumbled nearly 2% to $54.57 around midday, short-term put options on the stock have actually declined in value. The reason: a massive volatility crush.

For example, yesterday's most active strike was the weekly 12/5 50 put, which traded at a volume-weighted average price (VWAP) of $0.46. While one might assume that this morning's sell-off would make these puts more valuable, the opposite is actually true -- VWAP is now sitting at just $0.09, due to a plunge in implied volatility.

Essentially, the options market had priced in a much bigger post-earnings move for AMBA -- 13.5%, to be specific -- than what actually materialized. In other words, it was a great opportunity to sell premium on the stock ahead of earnings, and data from the International Securities Exchange (ISE) indicates a few savvy traders did just that at the weekly 12/5 50-strike put.

Returning to the quarterly report itself, Ambarella Inc (NASDAQ:AMBA) topped the Street's per-share profit and sales estimates for the fiscal third quarter. The brokerage bunch responded to the news positively, as no fewer than five firms upped their price targets on the stock.


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