Twitter (TWTR) Option Traders Bullish After Earnings

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Twitter (TWTR) Option Traders Bullish After Earnings

Investors have kept Twitter, Inc. (TWTR) share prices range bound ahead of the release of its second quarter results report. With an increasing amount of out-of-the-money call options in the open interest, it indicates that options traders are poised to profit on a modest uptick. If Twitter reports a favorable earnings surprise, the extraordinary options activity might lead to a big upward trend in price movement.

A increasing amount of put options on TWTR remain open, with exceptionally large option premiums. Trading volumes imply that traders have been buying calls and selling options in expectation of a favorable earnings announcement. If Twitter’s earnings release falls short of market expectations, these bets may quickly unravel, putting negative pressure on the stock price.

It is tough to forecast which way a stock will move following results. A comparison of the price movement of stock prices and option trading activity, on the other hand, reveals that if the firm releases a bad report, TWTR shares might fall dramatically, falling below their 20-day moving average in the first few days following the announcement. This is possible because options are priced for a tiny shift, but unexpected bad news might take traders off guard and cause a large drop in price.

Key Takeaways

  • Traders and investors have held the price of TWTR shares in a narrow range ahead of the announcement.
  • Recently, the price went below its 20-day moving average.
  • Put and call prices indicate a greater upward movement.
  • 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 the TWTR stock on Tuesday. This resulted in the setting for the earnings report.

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Current Trends

The stock’s one-month trend has seen the share price flirt with the upper edges of the range while remaining slightly above the 20-day moving average until lately. It’s worth noting that share prices surged to the top of the range in June, only to fall down in the days leading up to the announcement.

The price has gone below the 20-day moving average after remaining consistently above it, as seen 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 shifted from the top of the spectrum to the center. This is a bearish price movement for Twitter shares.

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 scenario, where the price trend for Twitter has been maintaining in the medium range, chart watchers may see traders and investors showing complacency as earnings season approaches. The share price progressively increased in the week before results, only to fall below the 20-day moving average the following week. As a result, chartists must decide if the change reflects investors’ expectations for a positive 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 calls over puts by a narrow margin, since there are more calls than puts in open interest. This often indicates that investors anticipate favorable news from the corporate report. However, traders seem to be anticipating that TWTR shares would not move much, either up or down, after results.

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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

TWTR shares are average, thus option traders have priced their options as a bet that the stock will close inside one of the two boxes illustrated in the chart between now and July 23, 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, there is a 39% probability that Twitter shares will settle inside this range at the end of the week. The red box reflects the pricing for put options with a 41% chance of being exercised if prices fall after the announcement.

It is worth noting that approximately 686,000 call options were active in the open interest, compared to about 500,000 put options, illustrating the modest bias that option purchasers had, since the call option percentage was just slightly higher than the puts. 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 proportion of call options traded has not raised 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.

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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 run on either side. Even if calls are being bought over puts, this shows that option purchasers do 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 unexpectedly positive or unfavorable news might take investors off guard and result in an abnormally significant shift. TWTR shares plunged 15% the day after the last results release and continued to fall the next week until gradually rebounding beyond the pre-earnings price in June. Investors do not seem to be anticipating 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

TWTR shares frequently make significant changes following results, which may cause index prices to move immediately. Regardless of what the study says, it will almost certainly have a substantial influence on companies in the Communication Services sector. A strong report might boost the value of other companies in the industry, including Facebook, Inc. (FB), Alphabet Inc. (GOOG), and Snap Inc. (SNAP).It would also have an impact on exchange-traded funds (ETFs) like State Street’s Communication Services Sector Index ETF (XLC) and maybe State Street’s S&P 500 Index ETF (SPY).

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