Uber (UBER) Option Traders Expect Earnings Reversal

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Uber (UBER) Option Traders Expect Earnings Reversal

Investors of Uber Technologies, Inc. (UBER) have expressed pessimism ahead of the company’s fiscal second quarter earnings announcement by selling down the share price. At first glance, it appears that option traders are predicting a positive move, as there are a growing number of call options in the open interest. This unusual option volume has the potential to create strong downward pressure on the share price if UBER delivers a negative earnings surprise.

Uber is still interested in an increasing amount of call options, and option premiums are extremely high right now. Option traders have been buying calls and selling puts in anticipation of a favorable earnings report, according to trading volumes. Unwinding these bets may cause UBER’s share price to fall unexpectedly.

Forecasting the direction a stock will move after results is difficult. A comparison of the stock’s price movement and option trading activity, on the other hand, reveals that if UBER issues a bad report, the company’s share price might fall dramatically, moving farther away from its 20-day moving average in the days following the announcement. This is possible because options are priced assuming an upward advance, but a shockingly unfavorable report might take traders off guard and trigger a rapid drop in share price.

Key Takeaways

  • Before the results announcement, traders and investors reduced the UBER share price to a lower-than-average level.
  • The stock’s closing price has been much lower than its 20-day moving average.
  • Call and put pricing predicts a greater upward rise.
  • Support and resistance levels depending on volatility allow for a greater move to the upside.
  • This setup provides traders with the possibility to benefit from an unexpected earnings announcement.

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 represents the price movement of the UBER share price on Monday, August 2. This set the stage for the earnings announcement.

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Current Trends

UBER stock’s one-month trend shows the share price sliding well below the 20-day moving average, near the extremities of the volatility band. During this time span, the lowest Uber share price was about $45 in mid-July. In early July, the highest share price in the previous month was over $50. The price closed in the bottom section of the chart’s technical analysis.

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 went to the lowest range in the week before earnings. This price movement in UBER shares indicates that investors anticipate a bad earnings outcome.

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 share price trend for UBER has plummeted to an extreme range, chart watchers may see that investors and traders are displaying pessimism as the earnings release approaches. UBER’s share price slid further below the 20-day moving average in the week before results. As a result, chart watchers must determine if the move is indicative of investors’ anticipation for an unpleasant earnings release or not.

Option trading information may provide context to charts, allowing chart viewers to make an opinion about investor expectations. Recently, option traders have been increasingly preferring calls over puts. Normally, this indicates that investors anticipate a favorable earnings report and that traders believe UBER will trend upward following 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

Option traders realize that Uber shares are trading in a lower-than-average range and have priced their options to bet that the company will close inside one of the two boxes illustrated in the chart between now and Aug. 6, the Friday after the earnings announcement. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 38% probability that Uber shares will settle inside this range at the end of the week. The red box reflected the pricing for put options, which have a 34% chance of being exercised if prices fall after the announcement.

It’s worth noting that the open interest included almost 1.2 million active call options vs roughly 892,000 put options, illustrating the bias that option purchasers had, since call options accounted for more than half of the transactions. This quantity often indicates that call option traders anticipate a price rise. However, given the call and put boxes are almost the same size, we may conclude that the large number of call options exchanged has only moderately raised expectations.

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 go higher vs downwards. This shows that option purchasers have a strong belief about how the firm will report, since calls are being bought above puts. Although investors and option traders may not anticipate it, a surprise report might cause prices to rise or fall drastically.

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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 earnings report, Uber shares plunged 8.9% the next day and proceeded to decrease the following week until breaking through the 20-day moving average a few weeks later. Following this news, investors may anticipate a different kind of price movement. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

UBER shares have experienced dramatic movements following earnings in the past, so the news might directly affect index prices. Whatever the study says, it will almost certainly have an impact on technology stocks. A strong report might boost the value of other companies in the industry, including Shopify Inc. (SHOP), Snowflake Inc. (SNOW), and Lyft, Inc. (LYFT).It may also have an impact on exchange traded funds (ETFs) such as Vanguard’s Total Stock Market ETF (VTI) and the iShares Russell 1000 Growth ETF (IWF).

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