NXPI Option Traders Change Frequencies Ahead of Earnings

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NXPI Option Traders Change Frequencies Ahead of Earnings

Going into the company’s fiscal second quarter results report, investors in NXP Semiconductors N.V. (NXPI) have maintained share prices range-bound. Given the rising call option volume in the open interest, it first seems as if option traders are set up for a downturn. If NXPI reports a poor earnings surprise, the unusual option activity may produce a big downward trend in the price movement.

The open interest in call options on NXPI is continuing to increase, and option premiums are now abnormally high. Trading volumes suggest that traders have been hedging against a negative earnings report by selling options and purchasing calls. The share price of NXPI may experience unanticipated negative pressure if these wagers were to lose money.

It is difficult to anticipate with accuracy which way a stock will move after results. A comparison of the stock’s price movement and option trading activity, however, demonstrates that if NXPI releases a bad report, the company’s share price might decline dramatically and approach its 20-day moving average following the announcement. Options are priced assuming an upward trend, thus it is conceivable that unexpectedly bad news might take traders off guard and cause a sharp decrease in share price.

Key Takeaways

  • Before the release of the earnings report, traders and investors held the price of NXP Semiconductors’ shares within a narrow range.
  • The price of the stock has been ending slightly higher than its 20-day moving average.
  • Pricing for calls and puts indicates a greater move to the upside.
  • The support and resistance levels based on volatility enable a more forceful swing downward.
  • Traders have the chance to benefit from an unexpected profits result thanks to this setup.

Chart watchers may learn a lot by analyzing the specifics of both stock price and option activity, but it is crucial to comprehend the environment in which this price behavior occurred. The price movement for NXPI shares as of July 29 is seen in the chart below. As a result, the stage was set for the results release.

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Current Trends

The shares of NXPI stock have been fluctuating above and below the 20-day moving average during the last month, trading in the center of the volatility zone. The lowest NXPI share price over this time period was around $185 in mid-July, while the highest share price was just a few days earlier at almost $209. The center portion of the chart’s technical examinations is where the price ended up.

The studies’ 20-day Keltner Channel indications serve as its foundation. These are price levels that are multiples of the stock’s average true range (ATR). This array makes it easier to see how the price has increased to a midrange level in the week leading up to earnings. The price movement of NXPI shares suggests that market participants anticipate strong earnings results.

Tip

A common method for displaying historical volatility over time is the Average True Range (ATR). Two to four weeks of trade on a daily chart are often included in the 10 to 20 time periods that make up the standard average length of time utilized in its computation.

Chart watchers may see that traders and investors are showing confidence heading into earnings in this situation where the price trend for NXPI has stayed in an ordinary range but just moved over the 20-day moving average. It is noteworthy, nonetheless, that the share price of NXPI increased progressively in the week before results, before crossing the 20-day moving average a few days before the announcement. It is crucial for chart observers to ascertain whether or not the change reflects investors’ expectations for good results.

Information regarding option trading may provide chart viewers more context for understanding investor expectations. The open interest in options has somewhat more puts than calls, notwithstanding recent option traders’ small preference for calls over puts. The open interest contradicts the volume, which often indicates that investors are anticipating a strong earnings report.

Tip

A 20-day simple moving average, an upper and lower line, and a series of semi-parallel lines are shown by the Keltner Channel indicator. This channel indicator provides for a fantastic visualization tool for charting historical volatility since the higher 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.

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Trading Activity

Option traders have priced their contracts as a bet that the stock will close between today and August 6, the Friday following the release of the earnings report, inside one of the two boxes shown on the chart. They are aware that NXPI shares have risen to an average range and have priced their contracts accordingly. The price that call option sellers are providing is shown in the green-framed box. If prices increase, it suggests that there is a 33% likelihood that NXPI shares will complete the week with a closing inside this range. With a 35% likelihood that prices would fall after the announcement, the pricing for put options was shown in the red box.

The fact that there were more active call options in the open market than active put options—over 30,000 active call options vs almost 41,000 put options—shows the bias that option purchasers had because the vast majority of transactions were for put options. This sum often indicates that dealers in put options anticipate a fall in price. The fact that implied volatility has been increasing for call options while declining for put options is significant because it indicates that traders are selling puts and buying calls. The roughly similar size of the call box and put box indicates that the increased trading volume of put options has only slightly shifted expectations downward. It suggests a much more complacent view.

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The 10-day Keltner Channel research with a four-times ATR setting produced the purple lines on the graph. With this metric, the price action is more likely to produce zones of strong support and resistance that are strongly connected. When the channel lines have recently made a considerable turn, these areas become visible.

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The graphic below includes annotations for the levels that the turns designate. What stands out about this chart is how closely the call and put prices are spaced, leaving ample of room for either downward or upward movement. This indicates that even while puts are being preferred over calls by option purchasers, they may not be confident in the way the firm will report. Even when traders and investors might not anticipate it, a shocking announcement could cause prices to move sharply higher or down.

These levels of support and resistance demonstrate a wide range of price support and resistance. This makes it feasible that any news—surprisingly good or bad—will take investors by surprise and cause an out-of-the-ordinary huge move. The day of results and during the following week after the prior earnings release, NXPI shares declined by less than 1% each. Investors could anticipate a different price action in response to this news. Share prices might increase or decrease more than anticipated since there is lots of space in the volatility range.

Market Impact

The data probably won’t have a significant effect on indices since NXPI shares normally only move little following earnings. No matter what the study says, it will probably have an impact on semiconductor stock prices. Other industry companies like Texas Instruments Incorporated (TXN), Qualcomm Incorporated (QCOM), or Micron Technology, Inc. might benefit from a favorable report (MU).Exchange-traded funds (ETFs) like the VanEck Vectors Semiconductor ETF and the QQQ Trust ETF from Invesco would also be impacted (SMH).

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