Dell (DELL) Option Traders Betting on Earnings Beat

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Dell (DELL) Option Traders Betting on Earnings Beat

Optimistic investors have pushed up Dell Technologies Inc. (DELL) share prices 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 DELL reports a favorable earnings surprise, the extraordinary option activity might trigger a significant upward trend in the price movement.

DELL has a rising quantity of call options available, 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. Unwinding these bets might put unanticipated negative pressure on DELL’s share price.

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 DELL provides a bad report, the company’s share price might decline, moving closer to its 20-day moving average following the announcement. This is possible because options are priced anticipating an upward trend, but unexpected bad news might take traders off guard and cause a rapid drop in share price.

Key Takeaways

  • Traders and investors have bid up the share price of Dell Technologies ahead of the earnings report.
  • The stock has lately closed 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 intricacies of stock price and option activity may provide chart viewers with useful information. However, it is critical to understand the environment in which this pricing behavior occurred. The price movement for the DELL share price as of August 24 is seen in the chart below. This resulted in the setting for the earnings report.

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Current Trends

With a minor exception in mid-August, the share price of DELL stock has remained above its 20-day moving average during the last month. During this time span, the lowest DELL share price was $95 in late July, and the highest DELL share price was $101 the week before results. 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. This price movement in DELL shares suggests that investor confidence is increasing as the earnings release 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 DELL 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 DELL’s share price has been constant in the week before results, comfortably above the 20-day moving average. 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 favored calls by a slight margin over puts. On Tuesday, roughly 7,700 calls were exchanged for every 7,300 puts. Normally, this volume suggests that traders are modestly optimistic about the results announcement.

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.

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Trading Activity

Option traders realize that DELL shares are trading in an above-average range and have priced their options as a wager that the company would close inside one of the two boxes illustrated in the chart between today and Aug. 27, 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, it means a 34% chance that DELL shares will finish inside this range by the end of the week. The red box reflects the cost for put options, which have a 32% probability of going down after the announcement.

It is worth noting that the open interest ratio was over 78,000 calls to over 56,000 puts, illustrating the bias that option traders exhibited, as traders preferred calls over puts. While open interest and recent volumes reflect an increase in the number of puts traded, it is crucial to note that implied volatility for these put options has been declining, indicating that they are being sold rather than purchased. This implies a positive outlook for DELL profits. However, given the call and put boxes are almost the same size, we may conclude that the large number of sold call options has only marginally lowered expectations. A significantly more relaxed attitude is conveyed.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at 4 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.

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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 way but with much more room to the downside. This suggests that option buyers don’t have a strong conviction about how the company will report, even though recent call volumes outweigh put volume. Although investors and option traders do not expect it, a surprising report would 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, DELL shares fell 1% the day after earnings, before rising the following week. Investors may be expecting a similar positive move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

DELL is hardly a bellwether stock, so it’s unlikely that its earnings announcement will affect indexes directly. No matter what the report says, it’s likely to have an effect on stocks in the technology sector. A positive report could lift other stocks in the sector such as HP Inc. (HPQ), Logitech International S.A. (LOGI), or Western Digital Corporation (WDC) (WDC).It could also affect exchange traded funds (ETFs) such as Vanguard’s Total Stock Market ETF (VTI), Invesco’s Dynamic Market ETF (PWC), or First Trust’s U.S. Equity Opportunities ETF (FPX) (FPX).

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