ConocoPhillips (COP) investors have maintained the company’s share price range confined ahead of the company’s fiscal second 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 COP reports a favorable earnings surprise, the extraordinary option activity might lead to a big upward trend in price movement.
A increasing amount of call options continue to be active for COP, and option premiums are exceptionally high right now. Traders have been buying calls and selling options in expectation of a favorable earnings announcement, according to trading volumes. If these investments fail, the share price of ConocoPhillips might face unexpected negative pressure.
It is difficult to forecast the direction a stock will move after results. A comparison of the stock’s price movement and option trading activity, on the other hand, reveals that if COP provides a bad report, the company’s share price might fall dramatically, falling below its 20-day moving average following the announcement. This is feasible because options are priced assuming an upward movement, but unexpected bad news might take traders off guard and cause a rapid drop in share price.
- Traders and investors have kept the share price range bound headed into the earnings announcement.
- The share price has been closing just below its 20-day moving average.
- The price of calls and puts predicts a greater move to the upside.
- The volatility-based support and resistance levels enable a bigger upward rise.
- This setup provides traders with the possibility to benefit from an unexpected earnings result.
Chart watchers may acquire significant information by examining the intricacies of both stock price and option activity, but it is critical to understand the context in which this price behavior occurred. The chart below represents COP share price movement as of July 30. This set the stage for the earnings announcement.
COP stock has been trading in the center of the volatility band over the last month, dipping below the 20-day moving average. During this time span, the lowest COP share price was about $52 in mid-July, and the highest was approximately $63 in early July. 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 emphasizes how the price has grown to a mid-range in the week before results. This price movement in COP shares indicates that investors anticipate a bad 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 scenario, where the price of COP has stayed in an ordinary range but has lately increased approaching the 20-day moving average, chart watchers may see that traders and investors are optimistic about earnings. However, it is worth noting that, in the week before results, COP’s share price has been progressively rising, approaching the 20-day moving average a few days before the announcement. As a result, chartists must decide if the change reflects investors’ expectations for positive profits or not.
Option trading information may help chart viewers generate an impression about investor expectations by providing more context. Option traders have recently favored calls over puts. Typically, this volume indicates that investors anticipate a favorable earnings report.
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 realize that COP shares are ordinary and have priced their options as a bet that the company would close inside one of the two boxes illustrated in the chart between today and Aug. 6, the Friday after the publication of the earnings report. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 40% probability that COP shares will settle inside this range at the end of the week. The red box reflected the cost for put options with a 35% chance of going lower after the announcement.
It’s important to note that the open interest featured nearly 192,000 active call options compared to roughly 153,000 put options, demonstrating the bias that option buyers had, as the majority of the trades were call options. This amount normally implies that call option traders expect a rise in price. It is important to note, however, that implied volatility has been falling for put options but rising for calls, signaling that traders are selling puts and buying calls. Because the call box and put box are relatively equal in size, it tells us that the higher percentage of put options traded has only mildly skewed expectations lower. A far more complacent outlook is implied.
The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.
The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run either downwards or upwards. This suggests that option buyers don’t have a strong conviction about how the company will report, even though call are being purchased over puts. Although investors and option traders do not expect it, a surprising report could push prices dramatically higher or lower.
These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, COP shares rose by 5.5% the day of earnings and continued to rise the following week. Investors may be expecting a similar move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
COP shares typically make significant moves after earnings, so the results may have a direct impact on indexes. However, no matter what the report says, it will likely affect stocks in the energy sector. A positive report could lift other stocks in the sector such as Chevron Corporation (CVX), BP p.l.c. (BP), or TotalEnergies SE (TTE) (TTE).It could also affect exchange traded funds (ETFs) such as State Street’s Energy Sector ETF (XLE) or iShares’ U.S. Oil & Gas Exploration & Production ETF (IEO) (IEO).
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