After Citigroup Inc. (C) released second-quarter profit results that above expectations, options purchasers are taking measures that indicate they believe the stock price will rise in the future. This may come as a surprise given that the C share price fell 0.29% on the day the news was released.
Investors had maintained the share price range bound before to the results release, with a substantial quantity of put options in the open interest. The number of option trades suggested that traders were buying puts and selling calls. However, options activity after results implies that traders believe C will continue to rise. This is because price action seems to be maintaining support, but option activity suggests that traders are selling puts and buying calls.
A comparison of stock price movement and option trading activity on the days after results offers some indication that option traders may be cautiously hopeful. Even though Citigroup’s share price decreased 0.29% following the news, the action essentially brought prices closer to their 20-day moving average. C, on the other hand, fell well short of that target. Furthermore, put option activity has stayed pretty consistent, while call option activity has surged. This is possible because options traders feel Citigroup is cheap at the moment and that the stock price will rise in the short future.
- Traders and investors continued to buy Citigroup shares after the results report, despite the price falling less than 1%.
- The share price of C started the day above its 20-day moving average on the day of results but finished below it the next day.
- Despite the decrease in share price, put and call option activity looks to be positioned for a move upward.
- Volatility-based support and resistance levels provide for a greater upward mover than a downward mover.
- This scenario provides traders with a chance to benefit from a reversal in the earnings-based share price decrease.
Because option trading involves the activity of investors seeking to hedge long holdings or speculators seeking to benefit by accurately anticipating unanticipated movement in an underlying stock or index, their selections suggest a projection for the next weeks. This is because option trading is essentially a wager on market probabilities, undertaken by traders who are, on average, more educated than most investors. Understanding the context in which the pricing action occurred is critical to optimizing this understanding. The chart below displays C’s share price at noon Thursday, indicating the setup after the earnings release.
Over the duration of the one-month trend, the stock’s share prices have maintained in a broad range. C climbed above $80 per share in the beginning of June and then fell as earnings season neared, dropping almost 0.29% on the day of the release.
The price settled in the center of the range 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 emphasize how the price has fluctuated but largely stayed in an average range during the month. This price movement in C shares suggests that investors are not optimistic about C’s future prospects.
The ATR has become a widely used measure 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.
Based on the price movement for C, chartists can see that traders were not anticipating a large move higher or downwards leading up to earnings. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, traders tended to anticipate that C would not move much, either up or down, after results.
The Keltner Channel indicator shows a series of semi-parallel lines derived from the base of a 20-day simple moving average. 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’ recent activity suggests that they believe C shares are cheap and have acquired call options in the hope that the stock would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by call option sellers is shown by the green-framed box. It suggests that Citigroup shares will close inside this range or lower by August 20. As a result, sellers are just modestly optimistic. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing assumes just a 31% likelihood that prices would close above the green box, it suggests that purchasers are ready to risk the long odds.
It is worth noting that, as of Thursday, C had over 1 million call options in open interest compared to over 1.2 million put options, illustrating the bias that option purchasers had. They are close, but it looks that put options are being sold in greater numbers. This usually means that call option traders anticipate a price increase.
The volatility has lessened substantially after results, but the number of put options in open interest remains bigger than the number of calls. This indicates that put options are being sold rather than purchased, resulting in a positive attitude. The call volume vastly outnumbers the put volume for strikes at the money and one step either way. Out-of-the-money put option volume drops far quicker than out-of-the-money call option volume, indicating that more traders think C share prices will rise than those who believe they will fall.
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.
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 run on either side. This shows that option purchasers are unsure how the corporation will react in the aftermath of the revelation. Despite the fact that investors and option traders did not anticipate significant movement from the report, the share price moved less than it did following the last earnings announcement.
These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, it is probable that a major shift in either way may occur in the near future. Following the prior results report, C shares increased 0.5% the next day before beginning to fall the following week. Investors may anticipate a similar little price movement in the week after this release. With so much space in the volatility range, share prices may increase or fall more than anticipated in the short term; but, there is more capacity in the volatility range to support an upward trend.
Citigroup’s earnings report has market sway due to the company’s close ties to the banking industry. C shares often fluctuate very little following results, therefore the outcome has no direct impact on index prices. However, regardless of what the report says, it is expected to have a substantial influence on financial services companies.
As one of the first large firms to disclose its quarterly earnings report, C helps to set the tone for the market as a whole. The market’s reaction to a reasonably favorable report might have an impact on similarly possibly positive reports from other companies in the industry, such as Bank of America Corporation (BAC) or Wells Fargo & Company (WFC) (WFC).The Financial Sector Index ETF (XLF) from State Street lost less than 1% on the day the data was issued, but the KBW Bank ETF (KBWB) from Invesco plummeted about 2%.
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