JPMorgan (JPM) Option Traders Pessimistic Into Earnings

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JPMorgan (JPM) Option Traders Pessimistic Into Earnings

Investors have pushed up JPMorgan Chase & Co. (JPM) share prices ahead of the company’s fiscal third quarter results report. On the surface, it looks like option traders are bracing for a downturn, as the open interest gap between call options and puts widens. If JPMorgan presents a negative earnings surprise, the extraordinary option activity might trigger a significant downward trend in price movement.

JPM has a huge amount of put options active, and option premiums are exceptionally high right now. Traders have been purchasing options and selling calls in expectation of a bad earnings release, according to trading volumes. Unwinding these bets might put unanticipated upward pressure on JPM’s stock price.

It is difficult to forecast which way a stock will move following results. A comparison of the stock’s price movement and option activity, on the other hand, reveals that if JPMorgan presents a good report, the company’s share price might climb, rising further above its 20-day moving average following the announcement. 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.

Key Takeaways

  • Traders and investors have pushed up JPMorgan’s share price ahead of the earnings announcement.
  • 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 JPMorgan shares on October 11. This resulted in the setting for the earnings report.

Current Trends

JPMorgan stock has been dipping below and then recovering above its 20-day moving average during the last month. During this time period, the maximum JPMorgan share price was around $170 in early October, while the lowest share price was approximately $152 in late September. The price settled at the higher third of the range shown by the technical studies in this chart.

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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. This price movement in JPM shares suggests that investor confidence is increasing as the earnings announcement approaches.

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 context, where the price trend for JPMorgan stock has closed above its 20-day moving average, chart watchers may see that traders and investors seem to be expressing more confidence as earnings season approaches. It’s worth noting that JPM’s stock reached a one-month high in the week before results. 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 calls by a slight margin over puts. On Monday, approximately 52,000 calls were exchanged against roughly 38,000 puts. Normally, this volume suggests that traders are optimistic about the earnings announcement.

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.

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Trading Activity

Option traders realize that JPM shares are trading in an above-average range and have priced their options as a wager that the company would close inside one of the two boxes illustrated in the chart between today and Oct. 15, the Friday after the publication of the earnings report. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 28% chance that JPM shares will finish inside this range at the end of the week. The red box reflects the pricing for put options, with a 38% probability of being lower if prices fall after the announcement.

It is worth noting that the open interest contained more than 461,000 calls to almost 613,000 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 JPM earnings. However, given the call and put boxes are almost the same size, we may conclude that the larger proportion 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 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.

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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. JPM shares plummeted 1.5% the day after results and continued to tumble the next week after the prior earnings report. 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

Bank earnings season begins, and may give insight into general economic performance for the quarter as well as a projection of market expectations for the near future. As the first large bank to report profits, all eyes will be on JPMorgan, thus the news might have an immediate impact on indices.

Whatever the study says, it is expected to have an impact on banking sector equities. A strong report might boost the shares of other companies in the industry, such as Bank of America Corporation (BAC) or Wells Fargo & Company (WFC) (WFC).It may also have an impact on exchange traded funds (ETFs) like State Street’s S&P 500 Index ETF (SPY), iShares’ U.S. Financial Services ETF (IYG), or State Street’s Financial Sector ETF (XLF).

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