MorningWord 12/26/14: Short Stories $GPRO $T

by Dan December 26, 2014 9:35 am • Commentary

It’s a strange investment world we live in when I can talk about AT&T (T) and GoPro (GPRO) in a post detailing high short interest.

This may come as a surprise, but one of the top five most heavily shorted stocks on the NYSE in December was AT&T (T). A stock with a 5.5% dividend yield, per 24/7 Wall Street:

The number of AT&T Inc. shares short rose 8.9% in the first two weeks of the month to almost 279.00 million. That was the highest level of short interest in at least a year, and it represents 5.4% of the float. At the current average daily volume, it would take more than nine days to cover all short positions.

The wireless industry has no shortage of obstacles at the moment. And none are more important than the massive price-war they’ve going going. One that will only exacerbate in 2015. And this is at a time when costs of spectrum are going higher and the likelihood for continued consolidation doesn’t look great.  The second tier players like T-Mobile (TMUS) and Sprint (S) have started a race to the bottom on pricing. This has been entirely un-profitable for them and will ultimately be a huge drag on earnings for the biggies AT&T and Verizon (VZ).

This was evident in AT&Ts Q3 results and forward guidance.   The stock is cheap and pays a dividend with a massive yield. It is trading at the low end of the one year range and is not far away from closing an acquisition (DirectTV announced in May –here) that will define the company’s next 20 (or possibly longer) years. They can’t close the DTV merger fast enough as it’s a major effort to diversify a largely wireline and wireless.

But I suspect we see lower lows, and a higher dividend yield prior to the close of the DTV merger. So I’m not sure if there is any rush on this one.  And if rates were to inch up in 2015, some high yielding sectors like telecom could be come less attractive away from their core fundamental proposition.

And this is where I talk about GoPro in the same post as AT&T. On Monday’s Fast Money, and in this space on Tuesday, I highlighted GoPro’s ipo lock up expiration:

I detailed the weekly implied move, looking at the Dec 26th 58 straddle (the 58 call and the 58 put with the stock at $58) which was offered at $4.50 giving an implied move of about 8% in either direction.  On Fast Money I mentioned that I thought the move looked “fair”, meaning I didn’t think it was a sale and it didn’t seem particularly cheap to buy. Generally it is not a high probability trade to buy such large implied moves in front of events when options prices are elevated.

It turns out the move was cheap. The stock closed at $66.40 yesterday and is trading up at $68 in the pre-market.

But it’s important to note that there was one bet in the options that was not binary. The only real certainty was that the implied volatility of the GPRO options was going to go lower as the increased liquidity from the larger float would ease the borrow on the shares, lessening the impact on volatility from the high short interest (and hard to borrow shares).

Here was the chart of 30 day at the money implied vol in GPRO from Tuesday pre-open. The prior night’s close in the stock was $58 and the IV of options was about 69%:

GPRO 30 day at the money IV from June to Dec 22nd from Bloomberg
GPRO 30 day at the money IV from June to Dec 22nd from Bloomberg

And here it is after the stock’s 2 day 15% rally on the 6 month IPO lock up expiration. Vol is now about 59% (and going lower):

GPRO 30 day at the money IV as of last night's lose from Bloomberg
GPRO 30 day at the money IV as of last night’s lose from Bloomberg

With another lock up coming in mid February, I would expect to see a continued tempering of options prices in GPRO, which means that yield enhancement strategies could be attractive for long holders while long premium directional strategies could be challenged in a rapidly decreasing vol environment.