Ahead of the release of Twitter, Inc.’s (TWTR) second quarter earnings report, investors have maintained the company’s share prices range-bound. It seems that option traders are poised to expect a minor uptick given the rising quantity of out-of-the-money call options in the open interest. If Twitter surprises with a solid earnings report, the unusual options activity may result in a significant higher price trend.
With extremely large option premiums, an increasing number of put options are still available for TWTR. The trading activity suggests that traders have been buying calls and selling options in expectation of a strong earnings announcement. These bets might quickly reverse if Twitter’s earnings report falls short of market expectations, which would put negative pressure on the share price.
The direction a stock will move following results is impossible to anticipate with any degree of accuracy. However, if the business releases a bad report, TWTR shares might decline dramatically and move deeper below their 20-day moving average in the first few days after the announcement, according to a comparison of the price movement between stock prices and option trading activity. Options are priced for a slight shift, so this might occur, but unexpectedly bad news could take traders off guard and cause a big decrease in price.
- Prior to the announcement, traders and investors maintained the price of TWTR shares range-bound.
- Recently, the price lost ground to its 20-day moving average.
- A greater upward movement is predicted by put and call prices.
- The support and resistance levels based on volatility permit movement in either direction.
- Traders have the chance to benefit from an unexpected outcome thanks to this setup.
Speculators who aim to make money by accurately predicting unforeseen changes in an underlying stock or index, as well as investors who wish to safeguard their holdings, engage in option trading. As a result, trading options is essentially a wager on market possibilities. Chart watchers may learn a lot by analyzing the specifics of both stock and option price behavior, but it also helps to comprehend the environment in which this price behavior occurred. The price movement of the TWTR share price as of Tuesday is seen in the chart below. This established the framework for the earnings report.
The stock’s share price has been flirting with the range’s top limits throughout the last month, but up until lately, it has been barely above the 20-day moving average. It is noteworthy that share prices in June surged toward the upper end of the range before declining in the days leading up to the announcement.
The price has plummeted under the 20-day moving average after consistently trading above it, as seen on this chart. The studies’ 20-day Keltner Channel indicators are created. These are price levels that are multiples of the stock’s average true range (ATR). This array makes it easier to see how the price changed from being close to the top of the range to being in the center. The price movement for Twitter shares is negative.
A common method for displaying historical volatility over time is the Average True Range (ATR). Two to four weeks of trade on a daily chart are often included in the 10 to 20 time periods that make up the standard average length of time utilized in its computation.
Chart watchers may see that traders and investors are showing complacency coming into earnings in this situation where Twitter’s price trend has been staying in a medium range. The share price progressively increased in the week before results, but the following week it dropped below the 20-day moving average. That makes it crucial for chart watchers to discern if the change is reflecting investors’ expectations for a good earnings release or not.
Information regarding option trading may provide chart viewers more insight into the expectations of investors. Given that there are more calls than puts in the open interest of options, option traders have recently favored calls over puts by a little margin. This often indicates that the corporate report will have positive news for investors. However, in this case, traders seem to be anticipating that TWTR shares won’t move much following results, either up or down.
A 20-day simple moving average, an upper and lower line, and a series of semi-parallel lines are shown by the Keltner Channel indicator. This channel indicator provides for a fantastic visualization tool for charting historical volatility since the higher lines are produced by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price.
Option traders have priced their contracts as a wager that the stock would close between now and July 23, the Friday after the publication of the earnings report, within one of the two boxes shown in the chart. They are aware that TWTR shares are average and have priced their contracts accordingly. The price that the call option sellers are providing is shown by the green-framed box. If prices increase, there is a 39% probability that Twitter shares will finish inside this range at the end of the week. If prices decline after the announcement, the put option pricing in the red box has a 41% likelihood.
It is crucial to remember that the open interest contained more than 686,000 active call options compared to around 500,000 active put options, illuminating the modest bias that option purchasers had because the call option percentage was only marginally greater than the puts. Normally, this abnormally equal number suggests that option traders anticipate a move but are uncertain of its direction. The nearly similar sizes of the call and put boxes, however, indicate that the strong trading volume of call options has not raised expectations. This situation suggests a much more relaxed attitude.
The 10-day Keltner Channel research with a four-times ATR setting produced the purple lines on the graph. With this metric, the price action is more likely to produce zones of strong support and resistance that are strongly connected. When the channel lines have recently made a considerable turn, these areas become visible.
The graphic below includes annotations for the levels that the turns designate. What stands out about this chart is how closely the call and put prices are spaced, leaving plenty of room for movement on either side. Even if calls are being bought above puts, this shows that option purchasers don’t have a firm opinion about how the business will report. Even if traders and investors might not anticipate it, a shocking announcement would cause prices to move sharply higher or down.
These levels of support and resistance demonstrate a wide range of price support and resistance. Therefore, it’s likely that any news—surprisingly good or bad—will take investors off guard and cause an out of the ordinary huge move. TWTR shares dropped 15% the day after the prior earnings report was released, and then kept falling for the next week until gradually climbing above the pre-results price in June. Investors don’t seem to be anticipating the same type of price movement in response to this news. The volatility range has a lot of space, so share prices may climb or decrease more than anticipated.
After results, TWTR shares often change wildly, which might cause index prices to jump immediately. Regardless of what the investigation concludes, the stocks in the communication services industry will probably be significantly impacted. Other sector companies like Alphabet Inc. (GOOG), Snap Inc., or Facebook, Inc. (FB) might gain value from a favorable report (SNAP).Exchange-traded funds (ETFs) like State Street’s Communication Services Sector Index ETF (XLC) and maybe State Street’s S&P 500 Index ETF would also be impacted (SPY).
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