Bullish Flow Pushes Take-Two Vol, Reverses Skew; Bet On Earnings?

Take-Two Interactive Software, Inc. (TTWO) is a developer, marketer and publisher of interactive entertainment for consumers worldwide.

This is a vol and skew shape note coupled with some bullish order flow over the last couple of days. Let's start with the order flow yesterday, then Friday, and then finally look to the vol. Over 4,300 contracts have traded today in the first three hours on total daily average volume of just 2,438. 4,000 of those contracts were done as a Dec 8/11 risk reversal (selling puts to buy calls) for a $0.025 credit and from what I hear on the floor, there was no stock. The Stats Tab and Day's biggest trades are included below.




Even more interesting, in terms of bullish flow, was the action on Friday. It looks like there was naked OTM call buying in the Aug 10's ~5,300x. I've included the Options Tab from that day (on-close), below.

Tricky... Let's turn to the Chart 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 how far the underlying has dropped. The stock was trading above $16 in Feb and is now right on an annual low. The 52 wk range is [$9.13, $16.99], so as of this writing, TTWO stock is down ~45% from early Feb.

On the vol side, we can see how the implied has risen of late and diverged from the short-term historical realized vol. In English, as the stock has found a bit of a quiet period (with a downward tilt), the implied has been rising. As of now, the implied is trading well above both the short-term and long-term historical realized vols. Specifically:

IV30™: 46.40%
HV20™: 35.81%
HV180™: 32.35%

The 52 wk range in IV30™ is [23.71%, 79.60%], so the current level is still just in the 42nd percentile. In English, while the IV30™ has been rising of late (and is elevated to the realized vol), it's still "low" relative to its annual average. In any case, we see a dipping stock, rising vol and decidedly bullish order flow. I note that the next earnings release is due in early Aug.

Let's turn to the Skew Tab to examine the line-by-line and month-to-month vols.


We can see that Aug lies above the other front expiries (due to earnings). I do however also note that the upside vol (to the OTM calls) is bid in all three months. A fair question is, "is that normal for TTWO?" And the answer is... no.

I've included the Skew Tab from 7-5-2012 (Thursday) -- just before the bullish order flow started.


We can see quite clearly how the vol to the OTM calls was lower than the ATM and OTM puts, whereas now, the vol is elevated to those calls. In English, the bullish order flow has pushed the OTM call vol up and created a reverse skew shape. As those of you who read the blog regularly already know, this is one my favorite parts of the options market as it's one of the last places where we can observe in real-time the evolution of price discovery (unlike stocks when they halt and move in gaps). Very cool...

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


We can see across the top that the monthly vols are priced to 43.13%, 47.98% and 44.41%, respectively for Jul, Aug and Sep. I've highlighted the risk reversal today (in Dec) and the rather large OI in the Aug 10 calls that was established on Friday.

The flow and vol (and skew) point to the bet being made that "something" is coming in the next earnings announcement.

Disclosure: This is trade analysis, not a recommendation.