Royal Gold (RGLD) Option Traders Await Earnings Luster

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Royal Gold (RGLD) Option Traders Await Earnings Luster

Royal Gold, Inc. (RGLD) investors have bought down the share price to a below-average level ahead of the company’s fiscal fourth quarter results report. At first look, it seems like option traders are poised for a bullish move, as the number of call options in open interest exceeds the number of puts. If Royal Gold reports a negative earnings surprise, the extraordinary option activity might cause a severe downward trend in the price movement.

In the open interest for RGLD, call option numbers are increasing, and option premiums are now at an unusually high level. Trading volumes suggest that traders have been buying calls and selling puts ahead of a positive earnings release. If these speculations fail to materialize, the share price of Royal Gold might fall unexpectedly.

It is difficult to forecast the direction a stock will move following results. A comparison of the stock’s option activity and price movement, on the other hand, reveals that if Royal Gold provides a bad report, the company’s share price might fall dramatically, falling below its 20-day moving average following the announcement. This might occur when options are priced assuming an upward trend, but unexpected bad news could take traders off guard and cause a fast drop in share price.

Key Takeaways

  • The Royal Gold share price has been reduced by traders and investors ahead of the results release.
  • The stock price just closed significantly below its 20-day moving average.
  • The price of calls and puts predicts a greater move to the upside.
  • The volatility-based support and resistance levels enable a bigger upward rise.
  • This setup provides traders with the possibility to benefit from an unexpected earnings outcome.

Comparing the details between stock price and option behavior can grant chart watchers valuable insight; however, it is imperative to understand the context in which this price behavior took place. The chart below illustrates the price action for the RGLD share price as of Aug. 10. This created the setup leading into the earnings announcement.

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Current Trends

Over the past month, the trend for RGLD stock rose above the 20-day moving average into the upper third of the volatility range in late July, before falling to the lower third of the range, closing well below the 20-day moving average in early August. In this time period, the lowest RGLD share price was around $112 in early August, and the highest share price was over $122 in late July. The price closed in the lower region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has fallen below the 20-day moving average in the week before earnings. This price move from RGLD shares implies that investors’ confidence is waning as the earnings report approaches.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for RGLD has recently fallen below its 20-day moving average, chart watchers can recognize that traders and investors are expressing growing pessimism headed into earnings. It’s notable that, in the week before earnings, RGLD’s share price fell from its monthly high, closing well below the 20-day moving average. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for unfavorable earnings or not.

Option trading details can provide chart watchers with additional context to assist them in forming an opinion about investor expectations. Recently, option traders are favoring calls over puts over 2-to-1. Normally, this type of volume indicates that traders are feeling bullish toward the earnings report.

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Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn 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, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that RGLD shares are in a below average range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and Aug. 13, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 33% probability that RGLD shares will close inside this range by the end of the week if prices go higher. The red box represents the pricing for put options with a 36% chance if prices go lower on the announcement.

It’s necessary to note that the open interest featured over 9,500 calls compared to nearly 7,000 puts, demonstrating the bias that option buyers had, as traders favored calls over puts. Recent volumes have seen traders favoring calls over puts by a rate of 2-to-1, skewing the open interest numbers even further in favor of call options. However, because the call box and put box are relatively equal in size, it tells us that the growing percentage of call options has only mildly skewed expectations higher. A much more complacent outlook is implied.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

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The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run to the upside. This suggests that option buyers don’t have a strong conviction about how the company will report, even though recent call volumes outweigh put volume. Although investors and option traders do not expect it, a surprising report could push prices dramatically higher or lower.

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. Following the last results report, RGLD shares increased by 3.67% the next day before progressively increasing the following week. 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

Because RGLD is not a bellwether company, the earnings results are unlikely to have a direct influence on indices. Whatever the study says, it may have an impact for gold sector stocks. A good report might boost the stocks of Gold Fields Limited (GFI), Kinross Gold Corporation (KGC), or Yamana Gold Inc. (AUY).It may also have an impact on exchange traded funds (ETFs) like the GO Gold and Precious Metal Miners ETF (GOAU) or the VanEck Vectors Gold Miners ETF (GDX).

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