HSBC Option Traders Growing Confident Into Earnings

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HSBC Option Traders Growing Confident Into Earnings

Investors have maintained HSBC Holdings PLC (HSBC) share prices range bound ahead of the company’s fiscal second quarter results release. With an increasing quantity of out-of-the-money call options in open interest, it looks that option traders are well-positioned to profit from a bullish move. If HSBC reports a negative earnings surprise, the unusual option activity might cause a severe downward trend in price movement.

HSBC still has a significant amount of call options in open interest, with abnormally high option premiums. Trading volumes imply that traders have been buying calls and selling options in expectation of a favorable earnings announcement. If HSBC’s earnings release disappoints, these bets might quickly unravel, putting negative pressure on the company’s share price.

It is tough to forecast which way a stock will move following results. A comparison of the price movement of stock prices and option trading activity, on the other hand, reveals that if the firm presents a poor report, HSBC shares might fall dramatically, moving farther away from their 20-day moving average in the first few days following the release. This might occur when options are priced assuming a positive advance, but unexpected bad news could take traders off guard and cause a sharp drop in price.

Key Takeaways

  • Traders and investors have maintained the price of shares in a range as the announcement approaches.
  • The price just finished near, but still below, its 20-day moving average.
  • Put and call prices indicate a greater upward movement.
  • The volatility-based support and resistance levels allow for movement in either direction, with an emphasis on upward movement.
  • This setup provides traders with the possibility to benefit from an unexpected outcome.

Chart watchers may acquire important information by examining the specifics of both stock and option price activity, albeit this price behavior is best appreciated with context. The chart below depicts the price movement of the HSBC share price on Thursday, July 29. This depicts the setting before the earnings release.

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Current Trends

The stock’s one-month trend sees the shares moving in the lower confines of the bottom range. Notably, the highest HSBC share price in the last month was over $29 towards the end of June, and the lowest share price was about $26 in mid-June. The price settled in the center of the range 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 highlights how the price maintained in the lower range throughout the month until increasing closer to the 20-day moving average as earnings approached. This price movement in HSBC shares indicates that investors anticipate a good outcome from the announcement.

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 scenario, where HSBC’s price trend has been moving near the bottom of the range, chart watchers may see that traders and investors are expressing pessimism about results. The share price increased in the week before results, moving closer to the 20-day anticipated moving average the following week. As a result, chartists must decide if the change reflects investors’ expectations for a poor earnings release or not.

Option trading data may assist chart watchers build an impression about investor expectations by providing extra information. Recently, option traders have favored calls over puts by a narrow margin, since recent option activity had more calls than puts. This often indicates that investors anticipate favorable news from the corporate report. In this case, traders anticipate that HSBC will rise after 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 HSBC 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, there is a 31% probability that HSBC shares will settle inside this range at the end of the week. The red box reflects the pricing for put options, which have a 39% chance of being exercised if prices fall after the announcement.

It is worth noting that there were about 72,000 active call options compared to over 86,000 put options, illustrating the bias that option purchasers had, as puts outpaced calls by a close margin. This unusually large amount of puts often indicates that option traders are uncertain about a price decrease. However, the put/call ratio has been decreasing over the last five days as the number of call options has increased faster than the number of puts. However, given the call and put boxes are almost the same size, we may conclude that the slightly greater quantity of put options exchanged has not pushed expectations higher or lower. This situation suggests a significantly more relaxed attitude.

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 considerably more room to go on the upside. This shows that option purchasers are not confident in HSBC profits, despite the fact that calls are bought about equally to puts. Despite the fact that investors and option traders may not anticipate it, a surprise announcement might cause prices to move considerably in either way.

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. HSBC shares climbed 4.7% the day after the prior results report and continued to grow the following week. Investors may anticipate a similar price movement after this news. With so much space in the volatility range, share prices might increase or fall more than anticipated, but there is also greater possibility for prices to climb higher, above the 20-day moving average.

Market Impact

HSBC shares normally fluctuate little following earnings, thus the findings are unlikely to have a direct influence on index prices. However, regardless of what the study says, it will most certainly have an impact on banking sector equities. Other companies in the industry, including as Barclays PLC (BCS), Credit Suisse Group AG (CS), or NatWest Group PLC, might benefit from a good report (NWG).

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