After The Coca-Cola Company (KO) reported that it had beaten estimates for its second quarter earnings results, option traders are taking actions that imply they think the share price will drift higher in the future. This may come as a surprise considering that the KO share price rose less than 1.3% the day the report was announced.
Coca-Cola reported earnings per share (EPS) of $0.68 and $10.13 billion in revenue, beating analyst expectations calling for EPS of $0.56 and revenue of $9.32 billion. Notably, revenue surpassed pre-pandemic levels of 2019, prompting the soft drink giant to raise its full-year outlook. Prior to the announcement, investors had bid up the share prices, with a sizable amount of put options in the open interest.
Option trading volumes indicated that traders had been buying calls and selling puts; however, options activity after earnings suggest that traders are optimistic that KO could continue to trend upwards going forward. That’s because the price action has found support at elevated levels, while option activity implies that traders are both selling puts and buying calls.
Comparing the price action between stock prices and option trading activity on the days following earnings shows some evidence to suggest that option traders may be optimistic. KO’s share price rose 1.3% the day of earnings, closing well above its 20-day moving average the day after the announcement. Additionally, call option activity increased, while put option activity decreased. This could happen because options traders believe that KO has found support at these elevated levels and could continue higher in the near term.
- Following the results release, traders and investors purchased KO stock, which rose 1.3%.
- KO’s share price has deviated farther from its 20-day moving average.
- Put and call option activity looks to be geared toward the price rising further.
- The volatility-based support and resistance levels allow for a greater downward movement than an upward movement.
- This structure allows traders to benefit from a reversal in the earnings-based share price growth.
Option trading represents the activities of investors who want to hedge their long positions or speculators who want to profit from correctly predicting unforeseen movement in an underlying stock or index. The choices of these investors imply a forecast for the weeks ahead. That is because 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 this insight is to understand the context in which the price behavior took place. The chart below depicts the price action for KO’s share price on Friday, July 23, illustrating the setup after the earnings report.
The stock’s one-month trend saw it break through resistance in mid-July and trend upward, before increasing 1.3% on the day of the announcement and declining less than 1% the next day. 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 emphasizes how the price has climbed from the center of the range to the higher boundaries. This price movement in KO shares suggests that investors may be growing trust in KO 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 KO reaching the upper third of the range, chartists can see that traders were exhibiting optimism heading into results. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it looked that traders expected KO to rise 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.
Option traders’ recent activity suggests that they believe KO shares are cheap and have acquired call 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 call option sellers is shown by the green-framed box. It means that there is a 70% likelihood that KO shares will finish inside this range or higher by August 20. 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 30% possibility that prices would close above the green box, it suggests that purchasers are ready to accept the long odds.
It is worth noting that open interest on Friday included over 478,000 call options vs around 307,000 put options, illustrating the bias that option purchasers exhibited, as traders preferred calls over puts. This usually means that option traders anticipate an increase in price fluctuation. After results, volatility fell considerably, yet the number of put options in open interest fell while the number of call options soared. This indicates that call options are being purchased rather than sold, resulting in a positive attitude. The call volume vastly outnumbers the put volume for strikes at the money and one step either way. Out-of-the-money put option volume drops far quicker than out-of-the-money call option volume, indicating that more traders think KO share prices will increase than those who believe they will fall.
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 how close the call and put prices are, with lots of room to move lower. This shows that option purchasers are unsure how the corporation will react in the weeks following the report. Despite the fact that investors and option traders anticipated favorable movement from the report, the share price rose farther 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. Following the prior results report, KO shares jumped less than 1% the next day and steadily increased the following week. Investors may anticipate a similar price movement in the week after this release. Because there is a lot of space in the volatility range, share prices might increase or fall more than anticipated in the short term; nevertheless, there is more capacity in the volatility range to support a move to the downside.
Coca-Cola exceeded analysts’ earnings per share and sales forecasts. Revenue in 2019 topped pre-pandemic levels, prompting the business to enhance its revenue forecast for the year. Investors showed their faith in the firm by purchasing shares, driving the share price to the upper end of the volatility range on the charts. Bullish attitude seems to be shown by option traders who appear to be purchasing calls and selling puts. This activity, however, creates additional space in the volatility range for a future decline in the share price.
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