Alibaba Group Holding Limited (BABA) investors have voiced anxiety, buying down the company’s share price ahead of its impending results report. At first glance, it looks that option traders are anticipating a decline, as there is a significant volume of sold call options in the open interest. If BABA reports a favorable earnings surprise, the extraordinary option activity might lead to a big upward trend in price movement.
A increasing number of call options remain available for BABA, and option premiums are extremely high right now. According to the trading volumes, traders have been selling calls and purchasing puts in expectation of a poor earnings announcement. Unwinding these bets may result in unanticipated upward pressure on BABA’s share price.
It is tough to predict which way a stock will move following results. A comparison of option trading activity and stock price movement, on the other hand, reveals that if Alibaba releases a favorable report, the company’s share price might climb considerably, perhaps putting it closer to the 20-day moving average in the days following the announcement. This is possible because options are priced expecting a decline, but an unexpected earnings beat might take traders off guard and trigger a rapid spike in share price.
- Investors and dealers have pushed Alibaba’s share price to an all-time low ahead of the results presentation.
- The stock’s closing price has been much lower than its 20-day moving average.
- Call and put pricing predicts a greater negative move.
- Support and resistance levels depending on volatility allow for a greater move to the upside.
- This arrangement provides traders with the possibility to benefit on unexpected earnings outcomes.
Option trading is a wager on the market’s probability. Chart watchers may acquire significant information by analyzing the intricacies of both stock price and option activity, albeit it helps to understand the context in which this price behavior occurred. The chart below depicts BABA’s share price activity as of Friday, July 30. This resulted in the setting for the earnings report.
The one-month trend of BABA stock finds the shares plummeting to an extreme range, as investors have been concerned about China’s crackdown on its IT industry. It is worth noting that the maximum BABA share price during this time period was over $230 in late June, while the lowest share price was around $180 in late July. The price settled at the lower zone shown by the technical studies on 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 serves to demonstrate how the price has shifted from a high to a low range over the course of one month. This price movement in BABA shares indicates that investors do not anticipate a favorable earnings outcome.
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 environment, where BABA’s price trend has fallen to an extreme range, chart watchers may see that traders and investors are expressing pessimism about results. BABA’s share price dropped substantially below its 20-day moving average in the week before results. As a result, chartists must decide if the change reflects investors’ anticipation for bad results or not.
Option trading information may help chart viewers generate an impression about investor expectations by providing more context. Recently, option traders have favored calls over puts by a wide margin, since there are more calls than puts in open interest. A greater volume of calls than puts often indicates that traders tend to anticipate BABA to rise following results. However, although call option volume is increasing, implied volatility is decreasing, which often indicates that call options are being sold, indicating a pessimistic mood.
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.
Option traders have priced their options to wager that BABA shares would close inside one of the two boxes illustrated in the chart between now and Aug. 6, 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, it suggests a 36% chance that Alibaba shares will finish inside this range by the end of the week. The red box reflected the cost for put options with a 33% chance of going lower after the announcement.
It’s worth noting that the open interest included almost 2.3 million active call options vs around 1.7 million put options, illustrating the bias that option purchasers had, since call options accounted for more than half of the transactions. This quantity often indicates that call option traders anticipate a price increase. As previously stated, implied volatility is decreasing for call options while increasing for put options, therefore even though call options account for a bigger share of overall activity, these options look to be sold. A far more pessimistic view is suggested.
A 10-day Keltner Channel analysis set at four 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.
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 room to go higher vs downwards. Even if calls are trading ahead of puts, this shows that option purchasers do not have a strong confidence about how the firm 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. BABA shares dipped 6.2% the day after the prior results report and steadily climbed the following week. Following this news, investors may anticipate a similar price movement. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.
China equities have lately taken a battering as investors are worried about the Chinese government’s crackdown on technology and private tutoring. BABA’s profits, as one of the major Chinese equities, may have an impact on the rest of the country’s stocks.
Whatever the study says, it will almost certainly have a substantial effect on consumer cyclical equities. A good earnings surprise might boost the shares of other companies in the category, including Amazon.com, Inc. (AMZN) and eBay Inc. (EBAY).
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