Investors have maintained DocuSign, Inc. (DOCU) share prices range bound ahead of the company’s fiscal second quarter results release. At first sight, it looks like option traders are bracing for a downward move, as the open interest in put options is increasing. If DocuSign reports a negative earnings surprise, the extraordinary option activity might cause a severe downward trend in the price movement.
DOCU has a rising quantity of put options available, and option premiums are extremely high right now. Traders have been purchasing options and selling calls in expectation of a bad earnings release, according to trading volumes. Unwinding these trades might put DOCU’s stock price under unanticipated upward pressure.
It is difficult to forecast which way a stock will move following results. A comparison of the stock’s price action and option activity, on the other hand, reveals that if DOCU provides a favorable report, the company’s share price might climb, going above its 20-day moving average following the release. This is possible because options are priced expecting a decline, but unexpected positive news might take traders off guard and trigger a rapid jump in share price.
- Ahead of the results announcement, traders and investors have limited the share price range.
- The stock has lately closed above its 20-day moving average.
- The price of calls and puts predicts a bigger move to the negative.
- 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 chart below displays the price movement of the DOCU share price on September 1. This resulted in the setting for the earnings report.
DOCU stock’s share price has fallen below and then risen above its 20-day moving average during the last month. During this time span, the peak DOCU share price was about $315 in early August, while the lowest share price was $282 just a few days later. The price settled in the center of the range 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. DOCU shares’ price movement suggests that investor confidence is building as the results announcement approaches.
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 DOCU has closed above its 20-day moving average, chart watchers can see that traders and investors are becoming more confident about earnings. DOCU’s share price has been constant in the week before results, barely 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 puts by a slight margin over calls. On Tuesday, nearly 2,800 calls were exchanged for every 3,100 puts. Normally, this volume suggests that traders are somewhat pessimistic about the results announcement.
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 recognize that DOCU shares are in an average range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and Sept. 3, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 38% probability that DOCU shares will close inside this range by the end of the week if prices go higher. The red box represents the pricing for put options with a 31% chance if prices go lower on the announcement.
It is worth noting that the open interest ratio was over 128,000 calls to over 183,000 puts, illustrating the bias that option traders had, as traders preferred puts over calls. The implied volatility for greater volume puts has risen, suggesting that traders are purchasing these options. This implies a pessimistic outlook for DOCU profits. However, given the call and put boxes are almost the same size, we may conclude that the large number of acquired put options has only moderately lowered expectations. A significantly more relaxed attitude is conveyed.
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 opportunity to go either way, but with greater room to the downside. This shows that, despite recent call volume outweighing put volume, option purchasers are unsure about how the business 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. DOCU shares jumped 19% the day after the prior results report, before continuing to rise the following week. Investors may anticipate a similar favorable price movement after this news. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.
DOCU isn’t a bellwether company, therefore its earnings report is unlikely to have an immediate impact on indices. Whatever the study says, it is expected to have an impact on equities in the technology and software industries. A strong report might boost the shares of other companies in the industry, such as Workday, Inc. (WDAY) or Autodesk, Inc. (ADSK).It may also have an impact on exchange traded funds (ETFs) like Invesco’s QQQ Trust ETF (QQQ), Ecofin’s Digital Payments Infrastructure Fund (TPAY), and ARK’s Innovation ETF (ARKK).
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