Shopify (SHOP) Option Traders Unfazed by Post-Earnings Drop

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Shopify (SHOP) Option Traders Unfazed by Post-Earnings Drop

After Shopify Inc. (SHOP) disclosed that its fiscal second quarter profit results above analysts” forecasts, option traders are taking measures that indicate they believe the share price will rise in the future. This may come as a surprise given that the SHOP share price decreased by less than 1% the day after the information was released.

SHOP announced EPS of $2.24 and sales of $1.12 billion, above analysts’ expectations of $0.97 EPS and $1.04 billion in revenue. Notably, the business revised its expectation for 2021 but did not disclose precise information for the third quarter or beyond. Prior to the announcement, investors had kept Shopify’s share price range constrained, with a substantial number of call options in open interest.

Option trading volumes suggested that traders were buying calls and selling puts; yet, option activity after earnings suggests that traders are still bullish on SHOP’s share price in the future. That’s because, although the price action has fallen slightly below the pre-earnings share price, it seems to have found support, remaining just above the 20-day moving average, and option activity indicates that traders are continuing to purchase calls and sell puts.

Key Takeaways

  • SHOP stock dipped less than 1% after the results report, as traders and investors sold shares.
  • SHOP’s share price dipped closer to, but maintained slightly above, its 20-day moving average.
  • Put and call option activity looks to be geared toward a price increase.
  • Support and resistance levels depending on volatility allow for a bigger move to the negative.
  • This strategy allows traders to benefit from a reversal in the earnings-based share price trend.

Option trading is simply a gamble on the market’s probabilities—a bet made by traders who, on average, are more educated than most investors. Understanding the circumstances in which the price change occurred is critical to gaining maximum understanding into option trading activity. The chart below depicts the price activity for SHOP’s share price as of Aug. 6, highlighting the setup after the earnings announcement.

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Current Trends

The stock’s one-month trajectory saw it tumble from its all-time high in late July to a pretty typical range after the news. The price dropped to the center of the range, as shown by the technical studies on this chart.

The 20-day Keltner Channel indicators are used to create these studies. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price has declined from the higher constraints of this range to the middle bounds. This price movement in SHOP shares suggests that investors have reduced their expectations for SHOP’s future worth.

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 SHOP closing above its 20-day moving average, chartists may see that traders were optimistic heading into results. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, traders looked to be anticipating Shopify shares to rise after 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.

Trading Activity

Option traders’ recent activity suggests that they believe SHOP shares are cheap and have purchased 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 SHOP shares have a 69% probability of closing inside this range or higher 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 assumes just a 31% likelihood that prices would close above the green box, it suggests that purchasers are ready to risk the long odds.

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It is worth noting that open interest on August 6 contained over 120,000 call options vs over 93,000 puts, illustrating the bias that option purchasers exhibited, as traders preferred calls over puts. This usually means that option traders anticipate price increases. After results, volatility has fallen significantly, yet the number of call options in open interest has increased while the number of put options has declined. This indicates that call options are being 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 call option volumes are declining at a slower pace than out-of-the-money put option volumes, indicating that more traders anticipate SHOP share prices will climb than decrease.

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.

The levels marked by the turns are noted in the chart below. The call and put prices are so far apart in this chart that there is plenty of room to go in either way. This shows that option purchasers are more confident that the price will fall in the weeks after the report. Despite the fact that investors and option traders anticipated upward movement from the report, the share price fell less than it did following 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. SHOP shares plunged 4.3% the day after the last results report, before plunging further the following week. Investors may anticipate a different kind of 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; yet, there is enough room in the volatility range to sustain a move in either direction.

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Wrapping Up

Shopify’s earnings per share and sales both exceeded analysts’ projections. The firm revised its expectation for 2021 but did not offer detailed advice, prompting some traders to sell their shares, leading the share price to fall to the center of the volatility band on the charts. Option traders seem to be purchasing calls and selling puts, indicating a positive view. This action leaves an equal amount of space in the volatility range for a future move up or down in the share price.

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