Schwab (SCHW) Option Traders Betting on Bounce Back

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Schwab (SCHW) Option Traders Betting on Bounce Back

Options purchasers are acting in a way that suggests they believe the share price has fallen too far and will rise in the future after The Charles Schwab Corporation (SCHW) disclosed that it failed profit projections for its second quarter earnings results. Given that the SCHW share price fell 3.2% the day the report was released, this could come as a surprise. Investors had maintained the share prices range-bound before to reporting, and there was a substantial quantity of call and put options in the open interest.

Options activity after results implies that this pattern has persisted, providing traders a positive perspective toward the SCHW share price. Option trading volumes previously suggested that traders had been buying calls and selling puts. That’s because the price action seems to be maintaining support, and the option activity shows that traders appear to be simultaneously purchasing calls and selling puts.

Options traders may be cautiously hopeful, according to a study of price movements between stock prices and option trading activity on the days after results. SCHW’s share price dropped 3.2% following results, but the selling caused prices to diverge from their 20-day moving average. In addition, although call option activity rose, put option activity remained mostly unchanged. This may occur as a result of options traders’ conviction that the share price of Schwab is now cheap and will soon rise.

Key Takeaways

  • Despite the price falling 3.2% after the results release, traders and investors continued to buy Schwab shares.
  • After the results announcement, the share price of SCHW plummeted even lower below its 20-day moving average.
  • Despite the decrease in the share price, put and call option activity seems to be set up for a rise.
  • The support and resistance levels based on volatility allow for a greater shift higher than downward.
  • Trading opportunities are presented by this setup should the decrease in share price based on earnings reverse.

Option trading may reflect the activities of investors who want to hedge their long holdings or speculators trying to benefit from accurately forecasting unanticipated volatility in an underlying stock or index. It can also signify a projection for the next weeks. Options trading is essentially a gamble on the market’s probability, one that is placed by traders who, on average, have more knowledge than the majority of investors. Maximizing this knowledge requires understanding the circumstances in which the share price behavior occurred. The price movement for Schwab’s stock on Tuesday is seen in the chart below, which also shows the post-earnings setup.

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Current Trends

Over the duration of the one-month trend, the stock’s share prices have stayed in a broad range. SCHW increased in price over the last month to around $75 per share around the middle of June and gradually declined as earnings time drew nearer before eventually falling 1.6% on the day of the release and 3.2% the day following. The price ended up in the bottom portion of the chart’s lower zone as shown by the technical analyses.

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 varied but has mostly remained within a typical range during the whole month. This price change for SCHW shares suggests that investors lack faith in the stock’s future.

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.

Based on the price trend for SCHW remaining in a moderate range, chart viewers may see that traders were not anticipating a large move either upwards or downwards coming into earnings. By focusing on the specifics of option trading, chart watchers might also develop an opinion on investor expectations. Before the release, traders seemed to anticipate that SCHW would not see a significant uptick or downtick following results.

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

The recent activity of option traders suggests that they believe SCHW shares to be cheap and have bought call options in an effort to predict that the stock will close inside the box shown on the chart between now and August 20, the next monthly options expiry date. The price that the call option sellers are providing is shown by the green-framed box. By August 20, there is a 68% likelihood that SCHW shares will finish inside this range or below. Sellers are thus just somewhat positive.

Buyers, however, are grabbing these prices, indicating that they believe these options are underpriced. It looks that purchasers are ready to face the long odds since the pricing suggests that there is only a 32% possibility that prices will close above this green area.

The fact that there were more call options than put options in the open interest on Tuesday, almost 97,000 to 98,000, shows that option purchasers were biased toward the put side. This large sum often indicates that put option traders anticipate a further decrease in the share price. Even though volatility has significantly lessened since results, there are still more put options than calls in the open interest. This indicates that put option sellers are selling them rather than buying them, which fosters a bullish outlook.

The call volume significantly exceeds the put volume for strikes at the money and one step in either direction. The amount of out-of-the-money put options drops considerably more quickly than the volume of out-of-the-money call options, indicating that more traders anticipate an upward trend in the price of SCHW shares than a downward trend.

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. This chart’s call and put prices are in such a narrow range with plenty of room to go higher, which is noteworthy. This implies that option purchasers aren’t entirely confident in the direction the firm will take in the wake of the report. The share price surged further than it did following the last earnings release, despite the fact that investors and option traders did not anticipate any movement from the report.

These levels of support and resistance demonstrate a wide range of price support and resistance. As a consequence, it’s probable that there may be a significant movement in either way soon. The day after the prior results report, SCHW shares fell by 1% before beginning to increase the following week. In the week after this statement, investors may be anticipating a similar little price movement. Share prices may increase or fall more than anticipated in the near future due to the wide volatility range; nonetheless, there is more space in the volatility range to support an upward trend.

Market Impact

Due to Charles Schwab’s significant ties to the financial industry, its earnings report has a significant impact on the market. After results, SCHW shares normally fluctuate little, thus the outcome doesn’t immediately affect index prices.

No matter what the investigation concludes, financial services stocks are probably going to be significantly impacted. Similar to how the market responded to a relatively unfavorable news, other industry companies like Visa Inc. (V) or PayPal Holdings, Inc. may have missed earnings expectations (PYPL).The day the data was issued, State Street’s Financial Sector Index ETF (XLF) and S&P 500 Index ETF (SPY) both had declines of 1.37% and 0.78%, respectively.

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