While investors have maintained Snap Inc. (SNAP) share prices range bound ahead of its second quarter results report, they have also offered a short-term downturn. On the surface, it looks that options traders are positioned to expect a negative move, as the open interest in put options has increased. If SNAP reports a favorable earnings surprise, the extraordinary option activity might result in a significant upward trend in price movement.
A substantial number of put options remain active for SNAP, with extremely high option premiums. The trading volumes show that traders have been buying options and selling calls in expectation of a disappointing earnings announcement. If Snap’s earnings announcement falls short of market expectations, these bets may quickly unravel, putting upward pressure on the stock price.
It is difficult to anticipate the path of a stock following results. A comparison of the price movement of stock prices and option trading activity, on the other hand, reveals that if the firm presents a favorable report, SNAP shares might gain dramatically, moving closer to their 20-day moving average in the first few days following the release. This is possible because options are priced for a tiny shift, but unexpected positive news might take traders off guard and cause a big spike in price.
- Traders and investors have held the price of shares within a narrow range ahead of the announcement.
- Prices have been closing below their 20-day moving average.
- Put and call prices indicate a sharper negative trend.
- Support and resistance levels depending on volatility allow for a move in either direction.
- This setup provides traders with the possibility to benefit from an unexpected outcome.
Option trading encapsulates the activity of speculators seeking to benefit from accurately projecting unexpected swings in an underlying stock or index, as well as investors seeking to safeguard their holdings. That is, option trading is a wager on market probabilities. Chart watchers may acquire significant information by analyzing the intricacies of both stock and option price behavior, albeit it helps to understand the context in which this price behavior occurred. The chart below displays the price movement of SNAP shares on Tuesday. This resulted in the setting for the earnings report.
The stock’s one-month trend shows that the shares are still trading in a range. It is worth noting that the highest SNAP share price in the last month was approximately $69 in early July, and the lowest share price was about $57. The price ended barely outside the intermediate area 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 serves to emphasize how the price has fluctuated but largely stayed in an average range during the month. This price movement in SNAP shares indicates that investors anticipate a decline after the next report.
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.
In this environment, where the price trend for SNAP has been holding in a moderate range and has just begun to trend downward, chart watchers may see that traders and investors are not thrilled about earnings. The share price steadily slipped below the 20-day moving average in the week before results. As a result, chartists must decide if the change reflects investors’ expectations for a poor earnings release or not.
Option trading data may assist chart watchers build an impression about investor expectations by providing extra information. Recently, option traders have favored puts over calls by a narrow margin, as put open interest outnumbers call open interest. This often indicates that investors anticipate bad news from the corporate report. However, traders tend to anticipate that SNAP shares will not move much, either up or down, after 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 for SNAP have priced their options as a wager that the stock would close inside one of the two boxes illustrated in the chart between now and July 23, the Friday after the publication of the earnings report. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 45% probability that Snap shares will settle inside this range by the end of the week. The red box reflects the pricing for put options with a 32% chance of being exercised if prices fall after the announcement.
Over 766,000 call options were active in the open interest, compared to approximately 967,000 put options, illustrating the bias that option purchasers had, as the majority of options were put options by a tiny margin. This abnormally equal quantity often indicates that option traders anticipate a change but are unsure of the direction. However, given the call and put boxes are almost the same size, we may conclude that the large number of put options sold has not lowered expectations. This situation suggests a significantly more relaxed attitude.
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. What stands out in this chart is how close the call and put prices are, with lots of room to run on either side. Even if puts are being bought above calls, this shows that option purchasers may not have a strong confidence about how the firm will report. Although investors and option traders may not anticipate it, a surprise report might cause prices to surge or fall drastically.
These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, any news, whether unexpectedly good or negative, may take investors off guard and result in an abnormally significant shift. Next the prior results report, SNAP shares dipped 7.45% the next day, then climbed somewhat the following week until gradually recovering above the pre-earnings price in May. Investors seem to be anticipating a similar price movement after this news. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.
SNAP shares generally make big swings following results, but the outcome would have minimal impact on key index prices. However, regardless of how the data is released, it is anticipated to have a greater effect on companies in the Communication Services sector. A strong report might boost the shares of other companies in the industry, including Facebook, Inc. (FB) and Google parent Alphabet Inc. (GOOG).It would also have an impact on exchange-traded funds (ETFs) like State Street’s Communication Services Sector Index ETF (XLC) and perhaps Vanguard’s Total Stock Market ETF (VTI).
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