Schwab (SCHW) Option Traders Betting on Bounce Back

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Schwab (SCHW) Option Traders Betting on Bounce Back

After The Charles Schwab Corporation (SCHW) reported that it had missed profit estimates for its second quarter earnings results, options buyers are taking actions that imply they think the share price fell too far and that it will drift higher in the future. This may come as a surprise considering that the SCHW share price dropped 3.2% the day the report was announced. Prior to earnings, investors had kept the share prices range bound, with a sizable amount of both call options and put options in the open interest.

Option trading volumes indicated that traders had been buying calls and selling puts, and options activity after earnings suggests that this trend has continued, giving traders an optimistic outlook toward the SCHW share price. That’s because the price action seems to be holding support, while the option activity suggests that traders are both buying calls and selling puts.

A comparison of the price action between stock prices and option trading activity on the days following earnings shows some evidence to suggest that option traders might be cautiously optimistic. Even though SCHW’s share price fell 3.2% after earnings, the selling moved prices further from its 20-day moving average after the announcement. Additionally, put option activity remained relatively stable, and call option activity increased. This could happen because options traders believe that Schwab stock is undervalued at current levels and that the share price will drift higher in the near term.

Key Takeaways

  • Despite the stock’s 3.2% drop after the results report, traders and investors continued to buy Schwab shares.
  • Following the results announcement, the share price of SCHW dropped further below its 20-day moving average.
  • Despite the share price decrease, put and call option activity looks to be positioned for a rise.
  • Volatility-based support and resistance levels provide for a greater upward mover than a downward mover.
  • This scenario provides traders with a chance to benefit from a reversal in the earnings-based share price decrease.

Option trading can imply a forecast for the weeks ahead; it represents the actions of investors who wish to hedge their long positions or speculators looking to profit from correctly predicting unforeseen movement in an underlying stock or index. Options trading is literally a bet on the probabilities of the market – a bet made by traders that are, on average, better informed than most investors. Understanding the context in which the share price behavior took place is the key to maximizing this insight. The chart below depicts the price action for Schwab’s share price on Tuesday, illustrating the post-earnings setup.

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Current Trends

The share prices of the stock have remained in a wide range over the course of the one-month trend. Over the past month, SCHW rose to nearly $75 per share near the middle of June and drifted lower as earnings approached, before finally dropping 1.6% on the day of the announcement and 3.2% the day after that. 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 moved around but mostly held in an average range all month. This price move from SCHW shares implies that investors are not confident in the stock moving forward.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

Based on the price trend for SCHW, chartists may see that traders were not anticipating a substantial move higher or downwards leading up to earnings. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, traders seemed to believe that SCHW would not move much, either up or down, following results.

Tip

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. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

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Trading Activity

Option traders’ recent activity suggests that they believe SCHW shares are cheap and have acquired call options in the hope that the stock would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by call option sellers is shown by the green-framed box. It means that there is a 68% likelihood that SCHW shares will finish inside this range or lower by August 20. As a result, sellers are just modestly optimistic.

Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing predicts just a 32% likelihood that prices would close above the green box, it seems that purchasers are ready to accept the long odds.

It is worth noting that open interest on Tuesday included around 97,000 call options compared to over 98,000 put options, illustrating the preference of option purchasers for puts over calls. This large sum usually indicates that put option traders believe the share price will continue to fall. The volatility has lessened substantially after results, but the number of put options in open interest remains bigger than the number of calls. This indicates that put options are being sold rather than purchased, resulting in a positive attitude.

The call volume vastly outnumbers the put volume for strikes at the money and one step either way. Out-of-the-money put option volume is declining considerably quicker than out-of-the-money call option volume, indicating that more traders anticipate SCHW share prices will rise than those who believe they will fall.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric creates 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.

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The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with lots of room to move higher. This shows that option purchasers are unsure how the corporation will react in the aftermath of the revelation. Despite the fact that investors and option traders did not anticipate significant movement from the report, the share price rose farther than it did after the last earnings announcement.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, a significant shift in either way is probable in the near future. Following the prior results report, SCHW shares fell by 1% the next day before beginning to increase the following week. Investors may anticipate a similar little price movement in the week after this release. With so much space in the volatility range, share prices may increase or fall more than anticipated in the short term; but, there is more capacity in the volatility range to support an upward trend.

Market Impact

Because of the company’s crucial tie to the financial industry, the impact of Charles Schwab’s earnings report is significant to the market. SCHW shares often fluctuate very little following results, therefore the outcome has no direct impact on index prices.

However, regardless of what the report says, it is expected to have a substantial influence on financial services companies. The market’s reaction to a relatively unfavorable news may have an impact on probable earnings misses of other companies in the industry, such as Visa Inc. (V) or PayPal Holdings, Inc. (PYPL).The Financial Sector Index ETF (XLF) of State Street declined 1.37% on the day the data was issued, while the S&P 500 Index ETF (SPY) fell 0.78%.

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