Traders have moved Macy’s, Inc. (M) share prices around substantially in the aftermath of the GameStop Corp. (GME) event. However, traders have kept Macy’s stock in a narrow range in the month leading up to its quarterly results presentation. Despite this, option traders paid a premium since they expected the stock to climb. It seems that they are anticipating really excellent news.
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 Macy’s shares soar, diverging away from the 20-day moving average in the first few days following the announcement, uptrend-focused traders will be in a position to benefit the most.
- Traders and investors have kept the price of Macy’s shares in a tight range heading into the earnings announcement.
- The price has been closing near its 20-day moving average.
- Put options are priced for a larger drop and call options for asmaller gain.
- The volatility-based support is greater than the resistance levels to allow for a strong move up.
- This setup creates an opportunity for traders to profit from a favorable result.
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 Macy’s share price activity and the setup building up to the earnings announcement.
The stock’s one-month trend shows it pushing over its extreme range before returning to its average. It is worth noting that Macy’s stock has risen over the last month, reaching more than $17 a share at the end of January. This was caused in part by the surge in numerous retail stocks. As the announcement date approaches, there has only been a modest retracement to $15 per share. 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 highlights how the price has moved from the highest extreme back to its typical range and remained there. This price movement for Macy’s shares suggests that investors are likely to be cautiously positive about the next 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 context, where the price trend for Macy’s has been moving from the top extreme to the center, chart watchers can see that traders and investors are expressing cautious optimism as the company prepares for results. 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. Option traders are preferring calls over puts, indicating that investors anticipate positive news from the corporate 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. Despite being in such a narrow range, prices are moving toward the top part of the volatility range. This pricing position indicates that investors have high expectations for the earnings announcement.
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 know that Macy’s shares are trading in a narrow range and have priced their options to bet that the company will close inside one of the two boxes illustrated in the chart between today and Feb. 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 72% likelihood that Macy’s shares will finish inside this range at the end of the week. The red box reflects the pricing for put options, with a 74% chance that prices will fall after the announcement.
It is worth noting that over 33,000 call options were exchanged on Tuesday, compared to about 12,000 put options, illustrating the bias that option purchasers had. The fact that just 26% of deals were put options suggests that option traders are very bullish, as indicated in the figure below.
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. The call pricing in this chart is bigger than the put pricing, indicating that traders anticipate the price to rise following results.
These support and resistance levels demonstrate an extremely wide range of price support and resistance. This is most likely due to unusual conditions. It is conceivable that neither positive nor negative news will cause a significant price movement. Macy’s shares increased by more than 19% in the days after the last results report. Investors may anticipate a similar price movement after this news. With an unusually wide range of volatility, share prices are unlikely to climb or fall more than anticipated.
The impact of Macy’s earnings report is not very relevant to the market because of the retail sector’s lessened influence on key indices since the epidemic struck. However, the company’s report happens on the same day as two other prominent firms in the consumer discretionary sector: The Home Depot, Inc. (HD) and Lowe’s Companies, Inc. (LOW) (LOW).No matter what the report from Macy’s says, the damage will be compounded by its timeliness. The cumulative effect of these firms’ results will almost certainly have a big influence on consumer discretionary equities.
Now that more than 70% of the S&P 500 companies have reported earnings so far this season and a large majority have beaten estimates, investors will likely expect the same from Macy’s. Anything less would be a shock. A positive report could lift other stocks in the sector such as Home Depot, The Walt Disney Company (DIS), or even Amazon.com, Inc. (AMZN) (AMZN).It would also affect exchange-traded funds(ETFs) such as State Street’s Consumer Discretionary Select Sector SPDR Fund (XLY) and potentially State Street’s SPDR S&P 500 ETF Trust (SPY) (SPY).
The Bottom Line
Option traders on Macy’s are favoring call options by a strong margin over put options before the company’s earnings announcement. Traders appear to be less nervous about bad news and more opportunistic for a possible jump higher in prices. Even if a bad report did materialize, Macy’s shares may not drop significantly, because investors might want to buy the dip as the company’s shares are priced so comparatively low at this time. The volatility price range size is enough to exceed the call pricing, allowing for a large move higher if the company were to somehow manage a positive surprise. Traders’ expectations may be overly optimistic because of the recent activity in retail stocks. Nonetheless, they remain optimistic.
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