Eli Lilly (LLY) Option Traders Prepped for Earnings Beat

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Eli Lilly (LLY) Option Traders Prepped for Earnings Beat

Optimistic investors have bid up the share prices of Eli Lilly and Company (LLY) ahead of its fiscal second quarter earnings report. At first glance, it appears that option traders are anticipating a positive move, as there are a high number of put options being sold in the open interest. This unusual option trading may create a downward trend in the price action if LLY delivers a negative earnings surprise.

A notable number of put options remain in the open interest for LLY, and option premiums are elevated right now. Option trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings report. If these bets were to unwind, it could result in unexpected downward pressure on the share price of Eli Lilly.

It is difficult to accurately predict the direction a stock will move after earnings. However, a comparison between the stock’s price action and option trading activity shows that, if Eli Lilly delivers a negative report, the company’s share price could fall significantly, moving closer to its 20-day moving average in the days after the announcement. This is possible because options are priced for an upwards move, but unexpected poor news could catch traders off guard and create a rapid decline in share price.

Key Takeaways

  • Traders and investors have pushed up Eli Lilly stock to an all-time high ahead of the results report.
  • The stock’s closing price has been much higher than its 20-day moving average.
  • Call and put prices indicate a bigger upward movement.
  • Support and resistance levels depending on volatility allow for a bigger move to the negative.
  • This arrangement provides traders with the possibility to benefit on unexpected earnings outcomes.

Option trading is a wager on the market’s probability. Chart watchers may acquire significant information by analyzing the intricacies of both stock price and option activity, albeit it helps to understand the context in which this price behavior occurred. The chart below depicts LLY’s share price activity as of Friday, July 30. This resulted in the setting for the earnings report.

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Current Trends

The LLY stock one-month trend sees the shares climbing into an extreme range. It is worth noting that the highest LLY share price in the last month was approximately $248 in late July. In late June, the lowest share price was at $217. The price settled at the top zone 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 shifted to a higher range over the month. This price movement in LLY shares indicates that investors anticipate a strong earnings outcome.

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 environment, where the price trend for Eli Lilly has been climbing to an extreme range, chartists may see that traders and investors are bullish about earnings. LLY’s share price achieved an all-time high in the week before results before falling marginally at the conclusion of the week. As a result, chartists must decide if the change reflects investors’ expectations for a positive earnings release or not.

Option trading information may help chart viewers generate an impression about investor expectations by providing more context. Recently, option traders have favored calls over puts by more than 2-to-1, as Friday’s option activity included more calls than puts. It should be noticed that there are more puts than calls in the open interest, but traders seem to be selling these options. Normally, this indicates that investors anticipate a strong earnings report and that traders seem to expect LLY to rise following results.

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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.

Trading Activity

Option traders have priced their options to wager that LLY shares will close inside one of the two boxes illustrated in the chart between now and Aug. 6, the Friday after the earnings report is announced. The price offered by call option sellers is shown by the green-framed box. If prices rise, it predicts a 37% chance that Eli Lilly shares will finish inside this range by the end of the week. The red box reflected the cost for put options with a 31% chance of going lower after the announcement.

It’s worth noting that the open interest contained around 59,000 active call options compared to about 88,000 put options, illustrating the bias that option purchasers had, since put options accounted for more than half of the transactions. This number generally indicates that put option traders anticipate a price decrease, however it should be noted that these put options seem to be sold, indicating a positive perspective. However, given the call and put boxes are almost the same size, we may conclude that the large proportion of options traded has only moderately raised expectations. A significantly more relaxed attitude is conveyed.

A 10-day Keltner Channel analysis set at four 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.

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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 go downwards as opposed to upwards. Even if calls are being bought over puts, this shows that option purchasers do not have a strong confidence about how the firm 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. Next the prior results report, LLY shares declined 0.91% the next day before steadily rising the following week, staying above the 20-day moving average for many weeks. Following this news, investors may anticipate a similar price movement. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

Because Eli Lilly is one of the world’s major pharmaceutical corporations, its financial results may have a direct impact on index pricing. Whatever the study says, it will almost certainly have a substantial influence on health-care stocks. A strong report might boost the stocks of other companies in the industry, including Johnson & Johnson (JNJ), Pfizer Inc. (PFE), and AbbVie Inc. (ABBV).It may also have an impact on exchange traded funds (ETFs) such as State Street’s Health Care Sector ETF (XLV) and Invesco’s Dynamic Pharmaceuticals ETF (PJP).

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