After DocuSign, Inc. (DOCU) disclosed that its fiscal second quarter financial results above analyst forecasts, option traders are taking measures that indicate they believe the share price will rise in the future. This may come as a surprise given that the stock price plummeted in the days after the announcement.
DocuSign announced earnings per share (EPS) of $0.47 and sales of $511.84 million, beating expectations of $0.40 and $487.99 million, respectively. In addition to exceeding expectations, DOCU earned multiple price target increases while projecting a slowing in future growth. Investors had held DOCU’s share price range bound prior to the news, with the stock closing just around its 20-day moving average.
Traders and investors have maintained the DOCU share price range bound prior to results. However, option trading activity after results suggests that investor confidence in DOCU’s share price in the future is increasing. Despite the fact that price action has fallen to a lower-than-average range, recent option activity suggests that traders are buying call options and selling puts.
- Following the results report, investors and traders sold down DOCU stock. The stock climbed 5.2% the day after results, then plummeted 5.9% the next day and 3.3% the next day.
- DOCU’s share price finished below its 20-day moving average.
- Put and call option activity looks to be positioned for an increase in the share price.
- The volatility-based support and resistance levels allow for a more aggressive upward surge.
- This scenario provides traders with a chance to benefit from a reversal in the earnings-based share price decrease.
Option trading is a literal gamble on the market’s probabilities—a bet made by traders who, on average, are more educated than most investors. Understanding the circumstances in which the price change occurred is critical to maximizing insight in option trading. The chart below depicts the price activity for DOCU’s share price on September 9, indicating the setup after the earnings announcement.
The stock’s one-month trend saw it stay in the center of the volatility range until sliding below the 20-day moving average after the news, finishing towards the bottom third of the volatility range shown by the technical studies on this chart. The 20-day Keltner Channel indicators are used to create these studies. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price has dropped to the bottom third of the volatility range. This price movement in DOCU shares suggests that investors are losing faith in DOCU’s share price in the future.
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.
Based on the price trend for DOCU closing exactly around the 20-day moving average, chartists may see that traders were displaying ambivalence heading into earnings. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it seemed that traders expected DOCU shares to fall following 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.
Options traders’ recent activity suggests that they believe DOCU shares are cheap and have purchased call options in the hope that the company would close inside the box illustrated in the chart between now and Sept. 17, the next monthly expiry date for options. The price offered by call option sellers is shown by the green-framed box. It means that there is a 69% likelihood that DOCU shares will finish inside this range or higher by September 17. 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 open interest on Wednesday included over 165,000 call options vs over 209,000 puts, illustrating option buyers’ bias. This usually means that option traders anticipate a decline in price. Volatility has lessened considerably after results, but the quantity of call options in open interest has climbed. This indicates a positive attitude.
The call volume outnumbers the put volume for strikes at the money and one step either way. Out-of-the-money call volume falls far more slowly than out-of-the-money put volume. However, it should be observed that the implied volatility of this put option volume is decreasing, suggesting that put options are being sold more than bought, despite the fact that they are being traded in huge numbers.
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 the discrepancy between call and put prices, which has lots of room to rise. This shows that option purchasers are more confident that the price will rise in the weeks after the report. Despite the fact that investors and option traders anticipated the report to be unfavorable, the share price fell 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, a significant shift in either way is probable in the near future. DOCU shares jumped 19% the day after the prior results report and continued to grow the following week. Investors may anticipate a similar price movement in the week after this release. With so much wiggle space in the volatility range, share prices may increase or fall more than anticipated in the short term. However, there is additional space in the volatility range to support an upward advance.
DocuSign’s sales and earnings per share above analyst projections. The firm got many price target increases, but also forecasted a future downturn in growth. The price increased 5.2% the day after results before decreasing 5.9% the next day and 3.3% the next day, finishing below its 20-day moving average. Option traders seem to be purchasing calls and selling puts, implying a positive view. This activity, on the other hand, creates more space in the volatility range for a future increase in the share price.
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