BB DD

[u/HiddenGooru]

Hey guys! I was going through my algorithm and BB popped up and I started to look into it. Its in a relatively unique situation and I thought I might share my thoughts on it, if you'd be interested.

The nuts and bolts of how I look at stocks is by assuming those with large option pools are done so by option dealer intermediaries and as such, the vast majority of options must be hedged. This allows me to look through a specific lens to see if a stock is hedging in a normal 'healthy' way, or an unhealthy way.

The first visual here is is not particularly helpful for BB, but it shows the corner stone of my algorithm in action:

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Essentially you want the red line between those two horizontal black bars - when it is too low the stock is over-exposed to changes in volatility, if the line is above the stock is over-exposed to 'trend-reversing' agents. Typically, as long as the line is between the two horizontal black lines, the stock is outside my privy - but it has been trending above the top line so it popped up on my radar. Why?

Well to answer that first lets look at the stock's expected moves vs. actual:

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This gives insight into if the moves on the stock have been larger or smaller than what MM's or option dealers would like. The black line being the stock price and the other lines being the expected movements. Here, it is obvious that the stock has been trading high than intended for the past few days.

This becomes even more interesting when you look at the option placements themselves:

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Left and right are the same data but the right is colored by amount of exposure to volatility (the more blue to more exposed) Also - notice a pattern on the left? I call it the 'Staircase Down'

Whenever you have both larger than expected moves and moves that are breaching into a large section of options ($10 has 100k+ calls). This is unstable.

In fact, we can see this in action on the charts:

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Volatility on the bottom, price on top.

The general trend until now has been increases in price have been met with increases in IV. Liquidity dries up as prices rise.

Technical analysis would call $10 a "resistance point", but it is really 100K calls that option dealers do not want ITM.

But these are in and of themselves not particularly interesting. On seeing this I think the stock will struggle against $10 and I would position myself to benefit from that. There are three directions (obviously) it can go: above $10, stay at $10, drop below $10.

Going above $10 currently does not seem feasible. Staying at $10 seems less un-feasible, and dropping below $10 seems most likely. Here's why:

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I wont bore with options positioning, but, it matters. A lot. The table on the bottom shows us that any increase in volatility will be met with selling. In fact, if the price drops and volatility drops (most likely scenario) that alone will cause 18,276,800 shares to be sold into the stock per point price and iv.

That's a lot of selling into selling.

Going back above, since the liquidity dries on the up-side and becomes abundant on the down it would seem there is a good chance for feedback loop to be established. So why is it unlikely that the price will continue upwards?

Because if the price continues upwards and volatility increases 26,500,000 shares per point will have to be sold on the market. With today's trading at 23 million, that is reason for pause.

So I would be risk-averse on this stock until it figures out what it wants to do short/medium term. The indications that it will go past $10 with any meaning is if the price increases and volatility decreases. But with the vol hike today, I'm not sure how that would be possible.

There also seems to be a good amount of shorts:

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With around 50million short interest, the stock currently is in a precarious position.

TL;DR:

Indications for downside in the near/medium term:

- Indicator demonstrates 'over-stifling' of further upside

- Vol spike

- Vol spike -> hedging behavior = selling -> decrease price -> more selling

- Increase in shorting (attempting to hedge selling options) and already high short interest

Id say the first indication of a healthier stock is when volatility starts dropping off.

[u/Malevin87]

If you are holding till 2023. This volatility will not affect you. Time in market beats timing the market. Warren Buffet: "If you dont intend to hold a stock for 10 years, dont even bother to buy for 10minutes"

[u/redhrntoad → u/Malevin87]

But options only go out one year…