Many investors got out of Pandora (P) stock well before Monday's WWDC keynote speech in anticipation of the announcement of a competitor product from Apple (AAPL). AAPL announced iRadio, an attempt to get in on the market dominated by Pandora, Spotify, and Songza, but the market reaction was not as dire as short sellers had expected, and shares closed higher by nearly 2.5% as shorts closed out their positions.
Some investors speculated that the move by AAPL could pressure Google (GOOG) or Amazon (AMZN) to buy P. Others took AAPL's entry as a sign that the market for streaming music might be more profitable than had been assumed. Whatever the merits of these sorts of rumors and speculation, they can have effects on the value of out of the money options. July 18 calls traded on Monday at about 58.4% implied volatility, which is actually greater than the average IV of at the money strikes.
Overall, short term implied volatility in P is in the bottom quartile of its one year range. While options could get cheaper still, with earnings and the WWDC announcement out of the way, there aren't as many catalysts for downside price action or spikes in volatility. At the same time, elevated upside skew - due perhaps to the churning rumor mill - allows us to take a bullish position at a significantly reduced cost.
Trade: Buy to open P July 16 calls for $0.95 and sell to open P July 18 calls at $0.35.
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