After Snap Inc. (SNAP) released second-quarter profit figures that above analysts’ forecasts, option traders are taking measures that indicate they believe the share price will fall in the future. This may come as a surprise given that the SNAP share price increased by 23.8% the day after the report was released. SNAP announced earnings per share (EPS) of $0.10 and sales of $982.1 million, beating analysts’ expectations of -$0.01 and $848.4 million, respectively. Notably, the company’s average daily users climbed by 2 million more than projected by analysts.
Prior to the announcement, investors kept the SNAP share price range constrained, with a substantial volume of put options in open interest. Option trading volumes revealed that traders were selling calls and buying puts; nonetheless, options activity after results implies that traders are still gloomy about SNAP’s share price, despite the firm clearly exceeding analysts’ forecasts. This is because price movement has reached the top of the volatility range, leaving additional space for a downward move, while option activity indicates that traders are continuing to sell calls and purchase puts.
When the price movement of option trading activity and stock prices on the days after earnings is compared, there is some indication that option traders may be gloomy. This should come as no surprise given that SNAP’s stock jumped 23.8% the day following results, finishing far above its 20-day moving average and setting an all-time high. Furthermore, put option activity rose while call option activity fell. This is possible because option traders think SNAP is overpriced at current high levels and will fall in the short future.
- Following the results release, traders and investors purchased SNAP shares, which increased by 23.8%.
- SNAP’s share price surpassed its 20-day moving average and set an all-time high.
- Put and call option activity looks to be geared toward a price fall.
- The volatility-based support and resistance levels allow for a greater downward movement than an upward movement.
- This structure allows traders to benefit from a reversal in the earnings-based share price growth.
Option trading reflects the activity of speculators seeking to profit by correctly forecasting unexpected movement in an underlying stock or index, as well as investors seeking to protect, or hedge, their long holdings. These investors’ behaviors suggest a projection for the next weeks. This is because option trading is a literal gamble on market probabilities, undertaken by traders who, on average, are more educated than most investors. Understanding the environment in which the pricing behavior occurred is critical to capitalizing on this understanding. The chart below displays SNAP’s share price activity on Tuesday, July 27, indicating the setup after the earnings announcement.
The stock’s trajectory during the last month saw it move in a broad range, bouncing above and below the 20-day moving average before surging 23.8% the day following the announcement. The price settled at the top zone shown by the technical studies on this chart.
The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price has climbed from the center of the range to the higher boundaries. This price movement in SNAP shares suggests that investors are optimistic about the stock’s future share price.
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 SNAP dropping below the 20-day moving average the week before the release, chartists may see that traders were expressing pessimism heading into results. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it looked that traders expected SNAP to fall following results.
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.
Option traders’ recent activity suggests that they believe SNAP shares are expensive and have acquired put 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 put option sellers is shown by the red-framed box. It means that there is a 68% likelihood that SNAP shares will finish inside this range or lower by August 20. As a result, sellers are just modestly bearish. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing predicts just a 32% possibility of prices closing below the red box, it seems that purchasers are ready to risk such long odds.
It is worth noting that open interest on Tuesday included over 811,000 call options vs over 1,000,000 put options, illustrating the bias that option purchasers exhibited, as traders preferred puts over calls. This usually means that option traders anticipate a price decline. The volatility has fallen substantially after results, but the number of put options in the open interest remains high, while the number of call options has decreased. This indicates that call options are being sold rather than purchased, resulting in a negative attitude. The put open interest substantially outnumbers the call open interest for strikes at the money and one step either way. Out-of-the-money call option volume is declining considerably quicker than out-of-the-money put option volume, indicating that more traders anticipate SNAP share prices will fall than increase.
A 10-day Keltner Channel study set at 4 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. What stands out in this chart is how close the call and put prices are, with lots of room to move lower. This indicates that option purchasers anticipate the share price is more likely to fall in the weeks following the report. Despite the fact that investors and option traders anticipated the report to be bad, the share price surged farther 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, it is probable that a major shift in either way may occur in the near future. Next the prior results report, SNAP shares surged 7.5% the next day and subsequently climbed the following week. Investors may not anticipate the same level of price movement in the week after this news. Because there is a lot of space in the volatility range, share prices might increase or fall more than anticipated in the short term; nevertheless, there is more capacity in the volatility range to support a move to the downside.
SNAP outperformed analysts’ estimates for earnings per share and sales. In addition, the firm claimed that its average daily users climbed by 2 million more than experts expected. Investors showed their faith in the firm by purchasing shares, driving the share price to the top end of the volatility range on the charts. Option traders seem to be selling calls and purchasing puts in order to signal a pessimistic attitude while receiving large premiums. However, the share price action does leave additional space in the volatility range for a future negative fall in the share price.
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