Apple Attack's Pandora: Is This The Start Of The End?

Pandora Media, Inc. (P), is an Internet radio service in the United States. As of January 31, 2012, it had over 125 million registered users.

This is a vol and stock note based on some very frightening news for P shareholders. A rather large company named Apple (AAPL) (actually the largest in the world) may have just ended their business. Here's the news:

NEW YORK (AP) -- Shares of Pandora Media Inc. tumbled Friday afternoon after a report by The Wall Street Journal that Apple Inc. is in talks to license music for an online radio service similar to Pandora's.

THE SPARK: The Journal's Friday edition said Apple is pursuing such a service because it is trying to expand its dominance in online music. It cited unidentified people familiar with the matter. Apple spokesman Tom Neumayr declined to comment on rumors and speculation.

THE BIG PICTURE: Pandora has several rivals already, including Spotify. But Apple's control over the iPhone and iPad could let it emphasize its own service.

Pandora pays royalties at statutory rates much like a regular radio station does. Apple is discussing licensing deals with record companies because it wants to sidestep some of the restrictions that apply to online radio. For instance, Pandora prevents users from listening to the same song twice in a row. -- Source: AP via Yahoo! Finance; Pandora down on WSJ's Apple online radio report.

That's ummm... scary... And I say that as my Pandora station plays in the background.

Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see that just a few weeks ago the stock was riding high off of the earnings release (8-29-2012 AMC). The price popped 14.3% ($10.08 to $11.52). Since then the stock continued its rise, closing at $12.57 yesterday -- which was more than a six-month high. But then today happened...

Looking to the vol side, we can see how elevated the implied got into that last earnings cycle. The risk was at a six month high, then vol collapsed on the good earnings report. The news today is very much a 180 in terms of Pandora's outlook. One thing that has me scratching my head (not that it takes much), is the vol move -- while it's an impressive spike, I kinda felt like it could go higher. Of course, timing is everything. As more details hit the news wires, P vol could continue to rise and not necessarily in small moves.

Let's turn to the Skew Tab.

While the skew across the months has maintained "normal" shapes, I do note that the front is well elevated to the back. The option market reflects substantially elevated risk to the downside in the near-term.

Finally, let's turn to the Options Tab, for completeness.

Across the top we can see the monthly vols are priced to 74.57%, 70.57% and 70.59%, respectively for Sep, Oct and Dec. I do note the vol diff between the Sep and Oct OTM puts. As one example, the Sep/Oct 9 put spread shows an 11+ vol point diff. My best guess is that P stock is steady until more news comes out. Whether the news is a rebuttal or a cataclysm, I dunno...

DISCLAIMER: This is trade analysis, not a recommendation.