Traders have driven Lowe’s Companies, Inc. (LOW) share prices higher ahead of its quarterly results release. There is no way to foresee the direction of a stock following an earnings report. A comparison of the price movement of stock prices and option prices, on the other hand, demonstrates that if Lowe’s shares fall, diverging away from its 20-day moving average in the first few days following the announcement, downward-focused traders will be in a position to benefit the most.
- Traders and investors have pushed Lowe’s stock higher ahead of the announcement.
- The price has been hovering around its 20-day moving average.
- Put options are more expensive for a loss than call options are for a gain.
- Volatility-based support is farther away than resistance.
- This strategy allows put option traders to benefit from a bad outcome.
Investors who wish to safeguard their holdings or speculators who seek to benefit from accurately projecting unexpected swings in an underlying stock or index engage in option trading. That is, option trading is a wager on market probabilities. Chart watchers may acquire significant information by analyzing the intricacies of both stock and option price behavior, albeit it helps to understand the context in which this price behavior occurred. The chart below displays the price activity for Lowe’s share price as well as the setup prior to the earnings announcement.
The stock’s one-month trend shows the shares maintaining in a medium range with a modest upward tendency. It is worth noting that throughout the last month, Lowe’s plummeted to $163 per share at the beginning of February, with just a modest increase as the announcement day approaches. The price settled in the center of the range shown by the technical studies on this chart. The studies are built on 20-day Keltner Channelindicators. These are price levels that are multiples of the stock’s average true range (ATR). This array serves to emphasize how the price has gone from the lower range to the average range and remained there. This price movement for Lowe’s shares suggests that investors are concerned about the impending report.
The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average number of time periods employed in its computation is 10 to 20, which encompasses one to two weeks of trade on a daily chart.
In this scenario, where the price trend for Lowe’s has remained in the center of the range, chart watchers may see that traders and investors are expressing concern about earnings. As a result, chartists must decide if the change reflects investors’ expectations for a positive earnings release or not.
Option trading data may assist chart watchers build an impression about investor expectations by providing extra information. Calls are somewhat more popular among option traders than puts. This shows that traders are concerned about negative news from the business report. A comparison of the volatility range indicated on the chart by the purple lines and the purple box in the backdrop provides more evidence.
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. This channel indicator is an effective visualization tool for charting historical volatility since the upper lines are produced by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price.
Option traders realize that Lowe’s shares are ordinary and have priced their options as a wager that the stock would close inside one of the two boxes illustrated in the chart between today and February 26, the Friday after the earnings announcement. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 74% probability that Lowe’s shares will finish inside this range at the end of the week. The red box reflects the value for put options with a comparable likelihood of being exercised if prices fall after the announcement.
It is worth noting that over 8,000 call options were exchanged on Friday, compared to about 5,000 put options, illustrating the bias that option purchasers had. Put options accounted for more than 40% of all deals, indicating that option traders are pessimistic.
A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric tends to provide 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 that the turns represent are shown in the chart below. This graphic shows that the call and put price is approaching the top border of the purple box. However, the put option range is lower than the call option range, indicating that investors aren’t anticipating a significant decline but still want to protect themselves against a negative report.
Prices have a broader range in front of support than in front of resistance at these support and resistance levels. As a consequence, it is probable that any negative news may take investors off guard and cause an exceptionally significant move. Lowe’s shares gained by just 5% in the days after the prior results report. Following this news, investors may anticipate a similar little price movement. With so much opportunity for movement in the volatility range, share prices may fall more than predicted.
Because of the company’s ties to the housing industry, the impact of Lowe’s earnings release is fairly important to the market. Lowe’s shares often move 5% following results, which may be significant for other companies in the industry – particularly when paired with the company’s main rival, The Home Depot, Inc. (HD), which reports at the same time this quarter. Whatever the Lowe’s report says, it will almost certainly have a substantial influence on consumer discretionary companies.
Investors will expect Lowe’s to do the same now that more than 70% of S&P 500 businesses have reported profits this season and a big majority have topped predictions. Anything less would be a surprise. A strong report might boost the shares of other companies in the industry, including Home Depot, The Walt Disney Company (DIS), and perhaps Amazon.com, Inc. (AMZN).It would also have an impact on exchange-traded funds (ETFs) like State Street’s Consumer Discretionary Select Sector SPDR Fund (XLY) and maybe State Street’s SPDR S&P 500 ETF Trust (SPY).
The Bottom Line
Before the company’s earnings release, option traders on Lowe’s are preferring call options by a slight margin over put options. Even though stocks have been trading in a modestly higher trend, investors seem to be concerned about what the report may bring. If a poor report comes out, Lowe’s shares might fall considerably, far more than their average 5% loss. The volatility price range is big enough to outperform the put pricing, allowing for a significant move down over the next week.
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