T-Mobile (TMUS) Option Traders Bearish Into Earnings

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T-Mobile (TMUS) Option Traders Bearish Into Earnings

Investors in T-Mobile US, Inc. (TMUS) have kept the stock price range confined ahead of the company’s fiscal second quarter results announcement. On the surface, it looks like option traders are forecasting a downward move, since there are more put options in open interest than call options. If TMUS reports a positive earnings surprise, the unusual option activity might result in a big upward price movement.

T-Mobile still has a large number of put options outstanding, and option premiums are particularly high right now. According to trading statistics, traders have been selling calls and purchasing puts in expectation of a bad earnings announcement. If these wagers come to fruition, the share price of TMUS may see unexpected upward pressure.

It is difficult to forecast the direction a stock will move after results. A comparison of the stock’s price movement and option trading activity, on the other hand, reveals that if TMUS presents a favorable report, the company’s share price might gain considerably, moving closer to its 20-day moving average in the days following the release. This may occur when options are priced assuming a negative move, but unexpected positive news may take traders off guard and trigger a rapid jump in share price.

Key Takeaways

  • Traders and investors have held share prices within a narrow range ahead of the results release.
  • Despite recently reaching an all-time high, the share price has been closing below its 20-day moving average.
  • Call and put pricing predicts a greater negative move.
  • The volatility-based support and resistance levels allow for a more aggressive upward surge.
  • This arrangement provides traders with the possibility to benefit on unexpected earnings outcomes.

Chart watchers may acquire significant information by examining the intricacies of both stock price and option activity, but it is critical to understand the context in which this price behavior occurred. The chart below depicts the TMUS share price action as of Wednesday, July 28. This set the stage for the earnings announcement.

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Current Trends

Over the past month, the trend of TMUS stock has the shares rising to their all-time high before falling below the 20-day moving average. Over the past month, it’s notable that the lowest TMUS share price was near $144 in mid-July, whereas the highest share price was nearly $150, an all-time high, just a few days prior. The price closed in the middle 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 to a lower range in the week before earnings. This price move from TMUS shares implies that investors expect a negative earnings result.

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.

In this context, where the price trend for TMUS has dropped to an average range, chart watchers may see that traders and investors are expressing pessimism as earnings season approaches. The week before results, TMUS’s share price hit an all-time high before falling marginally the following week. As a result, chartists must decide if the change reflects investors’ anticipation for bad results or not.

Option trading information may help chart viewers generate an impression about investor expectations by providing more context. Recently, option traders have favored puts over calls about 1.5-to-1, and the open interest in options is dominated by puts rather than calls. Normally, this indicates that investors anticipate a bad results report and that traders seem to expect TMUS to fall following earnings.

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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

T-Mobile shares are trading in an average range, thus option traders have priced their options as a wager that the company will close inside one of the two boxes illustrated in the chart between now and July 30, the Friday after the earnings report is announced. The price offered by call option sellers is shown by the green-framed box. If prices rise, it predicts a 36% chance that T-Mobile shares will finish inside this range by the end of the week. The red box indicated the pricing for put options, which have a 37% chance of being exercised if prices fall after the announcement.

It’s worth noting that the open interest included about 93,000 active put options compared to around 87,000 call options, illustrating the option buyers’ bias, since put options accounted for more than half of the transactions. This quantity often indicates that put option traders anticipate a price fall. However, given the call and put boxes are almost equal in size, we may conclude that the larger number of put options sold has only marginally lowered expectations. A significantly more relaxed attitude is conveyed.

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.

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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 in either way. 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. Following the prior results report, TMUS shares jumped 4.4% the next day and continued to increase for the next week until sliding closer to the 20-day moving average. Investors may not anticipate the same type of price movement after this news. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

T-Mobile shares normally fluctuate just little following results, thus the outcome is unlikely to affect index prices immediately. However, regardless of the report’s findings, it will almost certainly have an influence on companies in the communications industry. A good report might boost other sector companies like Verizon Communications Inc. (VZ) or AT&T Inc. (T).It might also have an impact on exchange-traded funds (ETFs) like State Street’s Communications Services Sector Index ETF (XLC) and Invesco’s QQQ Trust ETF (QQQ).

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