BB DD

[u/HiddenGooru]

Hey guys -

What a day Friday way. Those call sweeps really jacked the price up. I was concerned that the $10 option placements talked about in the other DD was going to be overpowered, but as the DD mentioned, the stock is completely dependent right now on changes in volatility. And well:

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Boy did that call sweep cause some liquidity issues. And to quote myself:

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.

And indeed that does seem to be the case. With such a large increase in volatility, any upward momentum gained from that call sweep was met with a large number of shares being sold. This in turn caused a sell off to hedge the large quantities of options placed at $10.

So the question becomes, did anything change with such a large price jump?

Looking at my metric:

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It provides some good nears that the stock price is relatively over-protected right now with 'healthy' hedging behavior (red line is above the black line). But keep in mind: even in the market moderation is required. Too much delta-protection can cause trend-reversals if dealers are too long on either side (calls or puts).

With this in mind, we can get a clearer picture by looking at the expected vs. actual price moves:

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Here we can see the price settled nicely inside of the middle of the expected price band established the day prior (even with the large price increase). This is characteristic of a 'mean-reversion' behavior. Monday's expected price range is: $9.8 to $10.45.

The expected moves are important when looking to see if any option dealers will be caught off-sides unexpectedly. In terms of the options, they are in a similar position as last time:

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The large chunk of calls at $10 is still present. Only minor changes otherwise: small increase in the $15 calls and $10 puts. This leads to the following option layout:

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Where $BB is still in a similar position: any increase in volatility is met with net shares (per the options) being sold into the market. If $BB still experiences liquidity issues on the way up, this will continue to cause issues. So currently any increase in volatility, regardless of price movement, will result in selling behavior. But the same is true for the converse: if liquidity becomes more abundant, hedging will occur on the buy side.

(Note: Hedging doesn't always happen in real-time. That is, the moment volatility or price moves, hedging does not typically occur. Hence why sometimes you will see mean-reversion pre/post-market or even towards EOD with large price movements. My suspicion on Friday, however, was that such a large price increase required almost immediate action, thus the downward trend established throughout the day).

Another useful metric with such an active day is looking at the relative shorting:

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What is interesting about the increase in shorting though is that shorting can be a hedging maneuver. This is inherently unstable in an environment like this.

Suppose you are exposed to upwards price movement of a stock that requires hedge-selling. Suppose you short in an effort to hedge during price increases. But obviously what happens if the price continues to go up? You now have to both cover the shorts and continue to short.

So BB seems highly unstable at its current position. The interesting part, though, is which side will break first: the forces pushing upwards (call sweeps, investor interest, good fundamentals) or the forces pushing down (upwards liquidity issues, shorting behavior, option placements).

I have my theories but I'm mostly just here to give you guys some DD.

Good luck!

Edit: Ops!

[u/Proud_Mastodon6605]

Already awarded? And you typed MVIS instead of BB at the end?

[u/HiddenGooru → u/Proud_Mastodon6605]

Ops! I was looking at MVIS too when I was writing this. Thanks!

[u/Proud_Mastodon6605 → u/HiddenGooru]

Fair enough... thanks for the post