Wendy’s (WEN) Option Traders Hungry for Earnings

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Wendy’s (WEN) Option Traders Hungry for Earnings

Investors in The Wendy’s Company (WEN) have held share prices within a narrow range ahead of the company’s fiscal second quarter results report. At first look, it seems that option traders are poised for a good move, as the quantity of call options in open interest is increasing. If WEN reports a negative earnings surprise, the extraordinary option activity might cause a severe downward trend in the price action.

WEN’s open interest in call options is increasing, and option premiums are extremely high right now. Trading volumes suggest that traders have been buying calls and selling puts ahead of a positive earnings release. If these bets were to reverse, the share price of WEN may experience unanticipated negative pressure.

Predicting the direction a stock will move following results is difficult. However, a comparison of the stock’s option activity and price action reveals that if WEN releases a bad report, the company’s share price may fall further, falling below its 20-day moving average after the announcement. This is possible because options are priced anticipating an upward trend, but unexpected bad news might take traders off guard and cause a fast drop in share price.

Key Takeaways

  • Ahead of the results announcement, traders and investors have limited the share price range.
  • The stock price just fell below its 20-day moving average.
  • The price of calls and puts predicts a greater move to the upside.
  • The volatility-based support and resistance levels allow for a more aggressive upward surge.
  • This setup provides traders with the possibility to benefit from an unexpected earnings outcome.

A comparison of the specifics of both stock price and option behavior may provide useful information to chart watchers; nevertheless, it is vital to understand the context in which this price behavior occurred. The chart below displays the WEN share price movement as of Monday, August 9. This resulted in the setting for the earnings report.

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Current Trends

The share price of WEN stock has been rising above and falling below the 20-day moving average throughout the last month. During this time period, the lowest WEN share price was about $21 in mid-July, while the highest share price was above $23 in late July. 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 emphasizes how the price fell below the 20-day moving average in the week before earnings. This price movement in WEN shares suggests that investor confidence is dwindling as the earnings announcement approaches.

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 context, where WEN’s price trend has lately dipped below its 20-day moving average, chart watchers may see that traders and investors are increasingly concerned about earnings. It’s worth noting that WEN’s share price broke its current trend and went below the 20-day moving average in the week before results. As a result, chartists must decide if the change reflects investors’ expectations for positive profits or not.

Option trading information may give extra context to chart viewers, allowing them to make an opinion about investor expectations. Calls have recently outperformed puts by a significant margin. On Monday, roughly 3,000 calls were exchanged against fewer than 700 puts. This volume often suggests that traders are pessimistic on the earnings release.

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.

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Trading Activity

Option traders have priced their options based on the fact that WEN shares have broken their trend and gone below the moving average, and they believe the stock will close inside one of the two boxes illustrated in the chart between now and Aug. 13, 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 40% chance that WEN shares will settle inside this range at the end of the week. The red box reflects the cost for put options, which have a 33% probability of going down after the announcement.

It is worth noting that the open interest included approximately 64,000 options vs over 45,000 puts, illustrating the bias that option purchasers had, as traders preferred calls over puts. On Monday, roughly 3,000 calls and fewer than 700 puts were exchanged, skewing open interest even more in favor of call options. However, given the call and put boxes are almost the same size, we may conclude that the increasing share of call options has only moderately raised expectations. A significantly more relaxed attitude is conveyed.

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 opportunity to go either way, but somewhat more room to the upside. This shows that, despite recent call volume outweighing put volume, option purchasers are unsure about how the business will report. Although investors and option traders may not anticipate it, a surprise report might cause prices to surge 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 unexpectedly positive or unfavorable news might take investors off guard and result in an abnormally significant shift. WEN shares climbed less than 1% the day after results and continued to grow the next week after the prior earnings report. Following this news, investors may anticipate a stronger favorable price movement. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

Wendy’s isn’t the most valuable firm by market capitalization, thus its results are unlikely to have a direct influence on indices. Whatever the study says, it may have an influence on restaurant stock prices. A strong report might boost the shares of other companies in the industry, including Wingstop Inc. (WING), Shake Shack Inc. (SHAK), and Jack in the Box Inc. (JACK).It may also have an impact on exchange traded funds (ETFs) like the iShares Core S&P Mid-Cap ETF (IJH) and the AdvisorShares Restaurant ETF (EATZ).

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