Affirm (AFRM) Option Traders Bullish Ahead of Earnings

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Affirm (AFRM) Option Traders Bullish Ahead of Earnings

Affirm Holdings, Inc. (AFRM) share prices have risen ahead of the company’s fiscal fourth quarter results release. At first look, it seems that option traders are well positioned for a good move, as the open interest in call options is increasing. If Affirm provides a favorable earnings surprise, the exceptional option activity might trigger a significant upward trend in the price movement.

The amount of call options available for AFRM is rising, and option premiums are extremely high right now. Traders have been buying calls and selling options in expectation of a favorable earnings announcement, according to trading volumes. If these wagers were to fail, the AFRM share price may face unexpected negative pressure.

It is difficult to forecast which way a stock will move following results. A comparison of the stock’s price movement and option activity, on the other hand, reveals that if Affirm Holdings issues a negative report, the company’s share price may decline, moving closer to its 20-day moving average following the announcement. This might occur when options are priced assuming an upward trend, but unexpected bad news could take traders off guard and cause a fast drop in share price.

Key Takeaways

  • Ahead of the results announcement, traders and investors have bought up the share price to an extreme range.
  • The stock price has lately closed well above its 20-day moving average.
  • The price of calls and puts predicts a greater move to the upside.
  • Support and resistance levels depending on volatility allow for a bigger move to the negative.
  • This setup provides traders with the possibility to benefit from an unexpected earnings outcome.

A comparison of the specifics of both stock price and option behavior may provide useful information to chart watchers; nevertheless, it is vital to understand the context in which this price behavior occurred. The chart below illustrates the AFRM share price action as of September 8. This resulted in the setting for the earnings report.

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Current Trends

After it was disclosed that AFRM was working on a payment system with Amazon.com, Inc., the share price of AFRM stock momentarily fell below the 20-day moving average before rebounding to the upper extremes of the volatility range (AMZN).During this time period, the lowest AFRM share price was about $61 in mid-August, while the maximum share price was above $100 in late August. The price settled at the top zone shown by the technical studies in this chart.

The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price has surged over the 20-day moving average in the week before results. The price movement in AFRM shares suggests that investor confidence is increasing as the earnings announcement approaches.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

In this context, where the price trend for AFRM has closed above its 20-day moving average, chart watchers can see that traders and investors are becoming more confident about earnings. It’s worth noting that AFRM’s share price has dropped somewhat in the week before reports, as investors take gains following the Amazon-related run-up. As a result, chartists must decide if the change reflects investors’ expectations for positive profits or not.

Option trading information may give extra context to chart viewers, allowing them to make an opinion about investor expectations. Recently, option traders have overwhelmingly favored calls over puts. On Wednesday, roughly 34,000 calls were exchanged for every 11,000 puts. Normally, this volume suggests that traders are optimistic about the earnings announcement.

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Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

Trading Activity

Option traders have priced their options to wager that AFRM shares will close inside one of the two boxes illustrated in the chart between now and Sept. 10, the Friday after the earnings report is announced. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 40% chance that AFRM shares will settle inside this range at the end of the week. The red box reflects the pricing for put options, which have a 26% probability of falling after the announcement.

It is worth noting that the open interest ratio was over 159,000 calls to over 96,000 puts, illustrating the bias that option traders had, as traders preferred puts over calls. Put implied volatility is decreasing, suggesting that traders are selling these options. This implies a positive outlook for AFRM profits. However, given the call and put boxes are almost the same size, we may conclude that the large number of acquired call options has only moderately raised expectations. A significantly more relaxed attitude is conveyed.

A 10-day Keltner Channel study set at 4 times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

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The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with lots of opportunity to go either way, but with greater room to the downside. This shows that, despite recent call volume outweighing put volume, option purchasers are unsure about how the business will report. Although investors and option traders may not anticipate it, a surprise report might cause prices to rise or fall drastically.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, any unexpectedly positive or unfavorable news might take investors off guard and result in an abnormally significant shift. AFRM shares plummeted 2.7% the day after results and continued to decrease the next week after the prior earnings report. Following this news, investors may anticipate a different price movement. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

AFRM is rarely a bellwether company, therefore its earnings announcement is unlikely to have a direct impact on indices. However, it may have an effect on equities in the information technology services business. A strong report might boost other industry stocks like Fiserv, Inc. (FISV), Infosys Limited (INFY), or Gartner, Inc. (IT).It may also have an impact on exchange traded funds (ETFs) like the ETFMG Prime Mobile Payments ETF (IPAY), the Innovator Loup Frontier Tech ETF (LOUP), and the Global X FinTech ETF (FINX).

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