Uber (UBER) Option Traders Expect Earnings Reversal

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Uber (UBER) Option Traders Expect Earnings Reversal

Prior to the release of the business’s fiscal second quarter results report, investors in Uber Technologies, Inc. (UBER) had sold off shares of the company. The open interest for call options is increasing, giving the impression that option traders are anticipating a favorable rise. If UBER reports a poor earnings surprise, this high option volume might put significant downward pressure on the share price.

The open interest in call options on Uber is continuing to climb, and option premiums are now abnormally high. Trading volumes indicate that option traders have been hedging their positions by selling options and purchasing calls in anticipation of a strong earnings report. The price of UBER’s stock might unexpectedly fall as a result of unwinding these bets.

It might be difficult to predict with accuracy which way a stock will move after results. A comparison of the stock’s price movement and option trading activity, however, demonstrates that if UBER releases a bad report, the company’s share price might decline dramatically and move farther away from its 20-day moving average in the days following the announcement. Because options are priced anticipating an upward movement, this might occur. However, a shockingly negative report could take traders off guard and cause a sharp decrease in share price.

Key Takeaways

  • Before the results announcement, traders and investors sold down the price of Uber shares to a range below average.
  • The closing share price has consistently fallen much below the 20-day moving average.
  • Pricing for calls and puts indicates a more forceful upward movement.
  • There is room for a greater move to the upside thanks to the volatility-based support and resistance levels.
  • A trading opportunity is presented by this setup in the event of an unexpected earnings release.

Chart watchers may learn a lot by analyzing the specifics of both stock price and option activity, but it is crucial to comprehend the environment in which this price behavior occurred. The price movement for the share price of Uber as of Monday, August 2, is shown in the chart below. As a result, the stage was set for the results release.

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Current Trends

The share price of UBER stock has been slipping significantly below the 20-day moving average and toward the extremes of the volatility range during the last month. It is noteworthy that throughout this time, the lowest Uber share price was about $45 in mid-July. Early in July saw the peak share price of the prior month, which was over $50. Price ended trading at the lower area indicated by the technical analyses on this chart.

The studies’ 20-day Keltner Channel indications serve as its foundation. These are price levels that are multiples of the stock’s average true range (ATR). The price movement to the lowest range in the week before earnings is better shown by this array. This price change in UBER shares suggests that market participants anticipate a poor earnings performance.

Tip

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 displaying pessimism in this situation since the share price trend for UBER has plummeted approaching an extreme range. The share price of UBER declined further below the 20-day moving average in the week before results. It is crucial for chart observers to determine if the movement is a sign that investors are anticipating a poor earnings report or not.

Information regarding option trading may provide chart observers more context for understanding investor expectations. Option traders now prefer calls over puts by a larger and wider margin. Typically, this indicates that traders believe UBER will trend upward following results and that investors are anticipating a strong earnings report.

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Tip

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.

Trading Activity

Option traders have priced their contracts as a wager that between now and Aug. 6, the Friday after the publication of the earnings report, the stock would finish inside one of the two boxes shown in the chart. They are aware that Uber shares are trading in a narrower range than the industry average. The price that call option sellers are providing is shown in the green-framed box. If prices increase, there is a 38% probability that Uber shares will close inside this range at the end of the week. When put options were priced, the red box indicated a 34% chance that prices would decline after the announcement.

The fact that there were more than 1.2 million active call options in the open market as opposed to just over 892,000 put options highlights the bias that option purchasers had, since more than half of the transactions were for call options. This sum often indicates that dealers in call options anticipate a rise in price. However, the fact that the call box and put box are around the same size indicates that the enormous volume of call options exchanged has only slightly inflated expectations.

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.

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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 spread out, with more room for upward movement than downward movement. The fact that calls are being bought over puts indicates that option purchasers are confident in the company’s reporting strategy. Even when traders and investors might not anticipate it, a shocking announcement could cause prices to move sharply higher or down.

These levels of support and resistance demonstrate a wide range of price support and resistance. This makes it feasible that any news—surprisingly good or bad—will take investors by surprise and cause an out-of-the-ordinary huge move. Following the prior earnings report, shares of Uber plunged by 8.9% the next day, then kept down over the next week until rising above the 20-day moving average a few weeks later. Following this news, investors could be anticipating a different sort of price movement. Share prices might increase or decrease more than anticipated since there is lots of space in the volatility range.

Market Impact

Since UBER shares have historically made significant swings after earnings, it’s probable that the outcomes may directly affect index prices. Whatever the report’s findings, they are expected to have an impact on the prices of technology sector equities. Other sector companies like Shopify Inc. (SHOP), Snowflake Inc. (SNOW), or Lyft Inc. might benefit from a favorable report (LYFT).Exchange-traded funds (ETFs) like the iShares Russell 1000 Growth ETF and Total Stock Market ETF (VTI) from Vanguard might also be impacted (IWF).

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