Verizon (VZ) Option Traders Prepare for Pop After Earnings

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Verizon (VZ) Option Traders Prepare for Pop After Earnings

While investors have kept Verizon Communications Inc. (VZ) share prices range bound ahead of its fiscal second quarter earnings announcement, they have also provided a short-term upward trend. On the surface, it looks that options traders are positioned to expect a bullish move, as there have been an increasing number of out-of-the-money call options in the open interest. If Verizon reports a positive earnings surprise, the unusual option trading could lead to a strong upward trend in price action.

A sizable collection of call options remains in the open interest for VZ, and option premiums are unusually high right now. The trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings report. Unwinding their bets could result in downward pressure on the price of VZ.

Accurately predicting the direction a stock will move after earnings is difficult. However, a comparison of the price action between stock prices and option trading activity shows that, if the company delivers a negative report, VZ shares could fall significantly, moving closer to the 20-day moving average in the first few days after the announcement. This could happen because options are priced for a small move, but unexpected poor news could catch traders by surprise and create a rapid decline in price.

Key Takeaways

  • Traders and investors have maintained share prices reasonably stable ahead of the announcement.
  • The price has been ending slightly higher than 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 represents the activities of investors who want to protect their positions or speculators who want to profit from correctly forecasting unexpected moves in an underlying stock or index. That means that option trading is literally a bet on market probabilities. By comparing the details of both stock and option price behavior, chart watchers can gain valuable insight, although it helps to understand the context in which this price behavior took place. The chart below depicts the price action for the VZ share price as of Tuesday morning. This created the setup leading into the earnings report.

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Current Trends

The stock’s one-month trend shows that the shares are still trading in a pretty narrow range. It’s worth noting that, during the last month, the highest VZ share price was about $57 in mid-July, and the lowest share price was around $55 the next day. The price settled in the center of the range shown by the technical studies 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 serves to emphasize how the price has fluctuated but largely stayed in an average range during the month. This price movement in VZ shares suggests that investors anticipate no change from the next report.

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 VZ 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 the open interest in options includes more calls than puts. This often indicates that investors anticipate favorable news from the corporate report. However, in this case, traders tend to believe that VZ will 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 derived from the base of a 20-day simple moving average. 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 VZ shares are average and have priced their options as a bet that the stock would close inside one of the two boxes illustrated in the chart between today and July 23, the Friday after the publication of the earnings report. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 57% probability that Verizon shares will finish inside this range at the end of the week. The red box reflects the pricing for put options, which have a 43% chance of being exercised if prices fall after the announcement.

It is worth noting that the open interest included about 476,000 call options active compared to over 277,000 put options, illustrating the bias that option purchasers had, while just 36% of the transactions were put options. This abnormally low sum generally indicates that call option traders anticipate a price increase. 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 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 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 news, whether unexpectedly good or negative, may take investors off guard and result in an abnormally significant shift.

Next the prior results release, VZ shares declined 1.5% the next day and continued to fall the following week until finally rebounding above the pre-earnings price the following week. Following this news, investors may anticipate a similar little price movement. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

Verizon shares generally change just little following results, thus the outcome has no direct impact on index prices. 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 stock prices of other companies in the industry, including AT&T Inc. (T), T-Mobile US, Inc. (TMUS), and Comcast Corporation (CMCSA).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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