Optimistic investors have seen Apple Inc.’s stock prices. (AAPL) before announcing earnings for the second quarter. At first glance, it appears that options traders are anticipating a positive move, as the number of call options exceeds the number of put options in the open interest. The unusual options trading could trigger a strong downward trend in price action if Apple delivers a negative earnings surprise.
A significant number of call options remain open to AAPL and option premiums are unusually high at the moment. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings report. Settling these bets could cause unexpected downward pressure on AAPL’s share price.
It is difficult to accurately predict in which direction a stock will move after profit. However, a comparison between the stock’s option trading activity and price action shows that if Apple releases a negative report, the company’s stock price could drop significantly, pushing it closer to its 20-day moving average in the days following the announcement. come. This is possible because options are priced for a small upward move, but unexpected bad news can catch traders off guard and cause a rapid drop in the stock price.
Key learning points
- Traders and investors have pushed Apple’s stock prices to extreme ranges en route to the earnings announcement.
- The share price closed well above the 20-day moving average.
- Call and put prices predict a stronger upward movement.
- The volatility-based support and resistance levels provide a stronger downward movement.
- This setup creates an opportunity for traders to take advantage of unforeseen profit results.
Options trading represents the activities of speculators seeking to profit from accurately predicting unexpected movements in an underlying stock or index, or of investors seeking to protect their positions. That makes options trading a literal gamble on market opportunities. By comparing the details of both option and stock price behavior, chart watchers can gain valuable insight, although it helps to understand the context in which this price behavior occurred. The chart below illustrates the price action for the AAPL stock price as of Friday, July 23. This created the lineup that led to the earnings report.
The one-month trend of AAPL stocks has pushed the stock to an extreme range. Notably, the AAPL stock’s highest price in mid-July last month was close to $148. The stock’s lowest price was about $133 at the end of June. The price closed in the upper region shown by the technical studies on this chart.
The surveys are formed by 20-day Keltner Channel indicators. These represent price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way price has moved into higher ranges throughout the month. This price movement of AAPL shares implies that investors expect a positive earnings result.
The Average True Range (ATR) has become a standard tool for displaying historical volatility over time. The typical average length of time used in the calculation is 10 to 20 time periods, including two to four weeks of trading on a daily chart.
In this context, where the price trend for AAPL has risen to an extreme range, chart watchers can recognize that traders and investors are expressing optimism about earnings. In the week before earnings, AAPL’s stock price hit its all-time high, only to pull back slightly the following Monday and move closer to that high. That makes it important for chart watchers to determine whether the move reflects investors’ expectations for a favorable earnings report or not.
Details on options trading can provide additional context to help chart watchers form an opinion about investor expectations. Recently, options traders have favored calls over puts at nearly three to one, as the open interest on options has a higher number of calls than puts. Normally, this suggests that investors expect a positive earnings report, and traders seem to expect AAPL to move higher after earnings.
The Keltner Channel Indicator displays a series of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Since the top lines are drawn by adding a multiple of ATR to the average and the bottom lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an excellent visualization tool when charting historical volatility .
Options traders recognize that AAPL stocks are in an extreme range and have priced their options as a bet that the stock will close within one of two boxes shown on the chart between today and July 30, the Friday after the earnings report is released. displayed. The green boxed box represents the prices that call option sellers are offering. It implies a 32% Apple stock will close in this range by the end of the week as prices move higher. The red box represented the pricing for put options with a 36% probability if prices move lower at the time of the announcement.
It is important to note that the open interest contained more than 5.4 million active call options, compared to approximately 3.9 million put options, demonstrating the preference that option buyers had, and more than half of the trades were call options. This amount normally implies that call option traders expect a price increase. However, because the call box and put box are relatively the same size, it tells us that the high percentage of call options traded has only slightly distorted expectations. A much more complacent view is implied.
The purple lines on the chart were generated by a 10-day Keltner Channel survey set at four times the ATR. This measure tends to create highly correlated regions with strong support and resistance in the price action. These regions appear when the channel lines have made a noticeable turn in the past three months.
The levels at which the bend marker is located are annotated in the table below. What stands out in this chart is that the call and put prices are so close to each other with plenty of room to run down compared to up. This suggests that option buyers do not have strong convictions about how the company will report, even if calls are bought instead of puts. While investors and options traders don’t expect it, a surprising report could push prices up or down dramatically.
These support and resistance levels show a wide range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will surprise investors and generate an unusually large move. After the previous earnings announcement, AAPL shares fell 1.5% the following day and continued to fall the following week, staying below the 20-day moving average for several weeks. Investors may not expect the same price movement following this announcement. With enough room in the volatility range, stock prices could rise or fall more than expected.
As one of the largest stocks by market capitalization and one of the most heavily weighted stocks in many exchange-traded funds (ETFs), Apple’s earnings can have a direct effect on index prices. Whatever the report says is likely to have a significant impact on technology sector stocks. A positive report could boost other stocks in the industry, such as Amazon.com, Inc. (AMZN), the parent company of Google Alphabet Inc. (GOOG) or Microsoft Corporation (MSFT). It would also affect State Street’s Technology Sector Index ETF (XLK) and State Street’s S&P 500 Index ETF (SPY).