Exxon Mobil (XOM) Option Traders Bearish After Earnings

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Exxon Mobil (XOM) Option Traders Bearish After Earnings

After Exxon Mobil Corporation (XOM) disclosed that its fiscal second quarter profit results above analysts’ expectations, option traders are taking moves that indicate they believe the share price will fall in the future. This may come as a surprise given the earnings beat and the fact that XOM shares climbed less than 1% the day after results and the day after that.

Exxon Mobil reported earnings per share (EPS) of $1.10 and revenue of $67.7 billion, beating analysts’ predictions calling for EPS of $0.96 and revenue of $61.1 billion. Prior to the announcement, investors had kept the share price of Exxon Mobil in an average range, with a high ratio of call options in the open interest.

Option trading volumes indicate that traders had been buying calls and selling puts; however, option activity after earnings suggests that traders are not confident in XOM’s share price going forward. That’s because the price action has not been able to break resistance and has remained in the middle of the volatility range, just below its 20-day moving average, while option activity implies that traders are buying puts and selling calls.

Key Takeaways

  • Following the results report, traders and investors purchased XOM stock, which increased less than 1%.
  • XOM’s stock finished below its 20-day moving average.
  • Put and call option activity looks to be geared toward a price fall.
  • The volatility-based support and resistance levels allow for a more aggressive upward surge.
  • This strategy allows traders to benefit from a reversal in the earnings-based share price trend.

Option trading is literally a bet on the probabilities of the market—a bet made by traders that are, on average, better informed than most investors. The key to maximizing insight into option trading activity is to understand the context in which the price movement took place. The chart below illustrates the price action for XOM’s share price as of Aug. 6, illustrating the setup after the earnings report.

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Current Trends

The one-month trend of the stock saw the share price falling from the highest point of this period at the beginning of July, falling to the low extreme of the volatility range in mid-July, before closing in the middle range, depicted 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 highlights how the price has plummeted from the centre of this range to the bottom boundaries before climbing back to the middle. This price movement in XOM shares suggests that investors have reduced their valuation of XOM in the future.

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.

Based on the price trend for XOM dropping below its 20-day moving average, chartists may see that traders were expressing pessimism heading into results. 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 XOM shares to rise following results.

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’ recent activity suggests that they believe XOM shares are overpriced and have purchased put options in the hope that the stock would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by put option sellers is shown by the red-framed box. It means that there is a 67% likelihood that XOM shares will finish inside this range or lower by August 20. As a result, sellers are just modestly bearish. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing predicts just a 33% possibility that prices would fall below the red box, it seems that purchasers are ready to risk the long odds.

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It is worth noting that open interest on August 6 contained over 923,000 call options vs over 592,000 put options, illustrating the bias that option purchasers exhibited, as traders chose calls over puts by a significant margin. This usually means that option traders anticipate an increase in price fluctuation. The volatility has fallen considerably after results, but the number of call options in open interest has climbed, while the number of put options has remained high. This indicates that call options are being sold rather than purchased, resulting in a negative attitude.

The call volume vastly outnumbers the put volume for strikes at the money and one step either way. Out-of-the-money call option volume is declining at a slightly quicker pace than out-of-the-money put option volume, indicating that more traders anticipate XOM share prices will fall than increase. However, the implied volatility of this call option volume is also dropping, suggesting that, although being traded in big numbers, call options are being sold more than purchased.

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.

The levels marked by the turns are noted in the chart below. What stands out in this chart is the wide discrepancy between call and put prices, with lots of room to go higher. This shows that option purchasers do not have a strong belief that the price would fall in the weeks following the report. Despite the fact that investors and option traders anticipated favorable movement from the report, the share price fell lower than it did following the last earnings announcement.

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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. Following the prior results report, XOM shares increased 2.7% the next day and continued to grow the following week. Investors may anticipate a price decline in the week after this news. With so much space in the volatility range, share prices may increase or fall more than anticipated in the short term; but, there is more capacity in the volatility range to support an upward trend.

Wrapping Up

Exxon Mobil exceeded analysts’ forecasts for earnings per share and sales. Surprisingly, traders and investors were unimpressed by the statement, leaving the share price in the center of the volatility band, despite the fact that the price has failed to breach the 20-day moving average since early July. Option traders seem to be selling calls and purchasing puts, implying a pessimistic 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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