Investors in Visa Inc. (V) have pushed up the share price ahead of the company’s fiscal third quarter results report. At first look, it seems like option traders are forecasting a bullish move, as the open interest in call options is increasing. If Visa reports a negative earnings surprise, the extraordinary option activity has the ability to put significant downward pressure on the share price.
A significant number of call options remain active for Visa, and option premiums are extremely high right now. Traders have been buying calls and selling options in anticipation of a strong earnings report disclosure, according to trading volumes. If these wagers were to reverse, Visa’s stock price may face unanticipated negative pressure.
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 Visa issues a bad report, the company’s share price might fall dramatically, moving closer to 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.
- Before the results announcement, traders and investors bought up the Visa share price to an extreme range.
- The stock price has been closing above its 20-day moving average and has lately reached an all-time high.
- Call and put options are forecasting a greater upward rise.
- Support and resistance levels depending on volatility allow for a greater move to the negative.
- This setup provides traders with the possibility to benefit from an unexpected earnings announcement.
Option trading, at its foundation, comprises the activities of investors seeking to protect their holdings or speculators seeking to benefit by accurately forecasting unexpected movements in an underlying stock or index. As a result, option trading is essentially a wager on market probabilities. Chart watchers may acquire significant information by examining the intricacies of both share price and option activity, but it is also helpful to understand the context in which this price behavior occurred. The chart below represents the price movement of the Visa stock on Monday, July 26. This formed the framework for the earnings report release.
Visa stock’s one-month trend shows it temporarily testing lower support levels around the 20-day moving average before surging into the extremes of the volatility range. During this time period, the lowest Visa share price was about $232 in late June. The day before the report was set to be released, the share price reached an all-time high of about $250. The price closed in the top 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 climbed to a greater range in the week before earnings. This price movement in Visa shares indicates that investors anticipate a favorable earnings outcome.
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 Visa’s share price trend has increased to an extreme range, chart observers may see that investors and traders are optimistic heading into the earnings presentation. Visa’s share price dipped closer to the 20-day moving average in the week before results before surging to an all-time high. As a result, chartists must determine if the movement is indicative of investors’ expectations for a positive earnings report 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 release and that traders believe Visa will continue to move upward following results.
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.
Option traders have priced their options to wager that Visa shares will close inside one of the two boxes illustrated in the chart between now and July 30, 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, it signifies a 35% chance that Visa shares will finish inside this range by the end of the week. The red box reflected the cost for put options with a 32% chance of going lower after the announcement.
It’s worth noting that the open interest included around 316,000 active call options vs about 245,000 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. It should be noted that the trading activity on Monday, the day before the results announcement, supported calls over puts by a ratio of 2.5-to-1.
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 downwards as opposed to upwards. 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. Following the last results report, Visa shares increased 1.5% the next day before steadily falling the following week, eventually falling below the 20-day moving average. Investors may not anticipate 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.
Visa shares normally fluctuate just little following results, thus the outcome is unlikely to immediately affect index prices. However, regardless of what the report says, it is expected to have a substantial influence on banking sector equities. A strong report might boost the shares of other companies in the industry, including Mastercard Incorporated (MA) and PayPal Holdings, Inc. (PYPL).It would also have an impact on exchange-traded funds (ETFs) like State Street’s Technology Sector Index ETF (XLK) and maybe State Street’s S&P 500 Index ETF (SPY).
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