Cautionary investors have held AT&T Inc. (T) shares in the lower range ahead of the company’s fiscal second quarter earnings announcement. With an increasing amount of out-of-the-money call options in the open interest, it seems that options traders are positioned to expect a minor upward rise. If AT&T reports a favorable earnings surprise, the extraordinary option activity might result in a significant upward trend in price movement.
AT&T’s open interest in call options continues to climb, with extremely high option premiums. Trading volumes imply that traders have been selling put options and purchasing calls in expectation of a favorable earnings release. If AT&T’s earnings report falls short of market expectations, these bets may quickly unravel, putting negative pressure on AT&T’s share price.
It is tough to forecast which way a stock will move following results. A comparison of stock prices and option trading activity, on the other hand, reveals that if the business provides a favorable report, AT&T shares might gain dramatically, moving closer to their 20-day moving average in the first few days following the release. This is possible because options are priced for a little movement, but better-than-expected excellent news might take traders off guard and trigger a big spike in price.
- Traders and investors have maintained share prices in a lower range ahead of the announcement.
- Recently, the price has been trading below its 20-day moving average.
- Put and call prices indicate a greater upward movement.
- The volatility-based support and resistance levels enable a bigger upward rise.
- This setup provides traders with the possibility to benefit from an unexpected outcome.
Option trading encapsulates the activity of speculators seeking to benefit from accurately projecting unexpected swings in an underlying stock or index, as well as investors seeking to safeguard their holdings. That is, option trading is a wager on market probabilities. Chart watchers may acquire significant information by analyzing the intricacies of both stock and option price behavior, albeit it helps to understand the context in which this price behavior occurred. The chart below displays the price movement of AT&T stock on Wednesday. This resulted in the setting for the earnings report.
Over the last month, the stock’s price has remained in the bottom boundaries of the range, below the 20-day moving average. It’s worth noting that share prices rose above the 20-day moving average in July, only to fall back below it in the days leading up to the announcement. As seen on the chart, the price has continually remained below the moving average.
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 stayed towards the bottom third of the range. This is a bearish price movement for AT&T shares.
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 AT&T’s price trend has been sticking in a lower range, chart watchers may see that traders and investors are concerned about earnings. The share price declined in the week before results, only to fall further below the 20-day moving average the following week. As a result, chartists must decide if the change reflects investors’ expectations for a poor earnings release or not.
Option trading data may assist chart watchers build an impression about investor expectations by providing extra information. Recently, option traders have favored calls over puts by a wide margin, with calls outnumbering puts in open interest. This often indicates that investors anticipate favorable news from the corporate report. However, in this case, traders tend to believe that AT&T will rise after results.
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 AT&T shares will close inside one of the two boxes illustrated in the chart between now and July 23, 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 35% probability that AT&T shares will finish inside this range at the end of the week. The red box reflects the cost for put options with a 26% chance of going lower after the announcement.
It is worth noting that the open interest showed almost 1.8 million active call options compared to about 1 million put options, illustrating the slight bias that option purchasers had, since there are more call options than puts. This unusual number usually indicates that option traders anticipate an upward advance. However, given the call and put boxes are almost the same size, we may conclude that the large amount of call options traded has not pushed expectations much higher. This situation suggests a significantly more relaxed attitude.
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 tight the call and put prices are, with little room to go downward compared to the possible scope for upward movement. Even if calls are being bought over 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 surge 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. AT&T shares surged 4% the day after the prior results release, then fell the following week before gradually climbing beyond the pre-earnings price in May. Investors may anticipate a similar price movement after this news. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.
Because AT&T shares normally fluctuate very little following results, the finding may not immediately affect index prices. Regardless of what the study says, it will almost certainly have a substantial influence on companies in the Communication Services sector. A strong report might boost the stocks of T-Mobile US, Inc. (TMUS), Twitter, Inc. (TWTR), and Verizon Communications Inc. (VZ).It would also have an impact on exchange-traded funds (ETFs) like State Street’s Communication Services Sector Index ETF (XLC) and maybe State Street’s S&P 500 Index ETF (SPY).
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