After AT&T Inc. (T) had reported that it had beaten estimates for fiscal second quarter results, options traders are taking actions that imply they believe the stock price will continue to rise in the future. This may come as a surprise, as AT&T’s share price rose less than 1% the day after the report came out.
AT&T reported earnings per share (EPS) of $0.89 and revenue of $44 billion, ahead of analysts’ forecasts of earnings of $0.80 per share and $42.7 billion in revenue. AT&T, in particular, also overwhelmingly exceeded analyst expectations of additional postpaid phone subscribers by 300%. Before the announcement, investors had kept AT&T’s stock price within the range, with a large number of out-of-the-money call options in the open rate.
Options trading volumes indicated that traders were buying calls and selling puts; however, post-profit options activity suggests that traders’ confidence in AT&T’s future stock price is increasing. That’s because the stock price has found a level of support but is still well below the 20-day moving average, while options activity implies that traders are both buying calls and selling puts.
Comparing the price action between stock prices and options trading activity in the days following the gains shows some evidence that options traders can be optimistic. AT&T’s stock price rose less than 1% on the day of earnings, closing well below its 20-day moving average. In addition, call option activity has increased, while put option activity has decreased. This could happen because options traders believe AT&T’s guidance on postpaid phone subscriber growth could lead to a rise in the near term.
Key learning points
- Traders and investors bought shares in AT&T after the earnings report, as the stock gained less than 1%.
- The stock price rose another half a percent the day after the gain, closing closer but still well below the 20-day moving average.
- The activity of put and call options seems to be positioned in such a way that the price rises from the current level.
- The volatility-based support and resistance levels make for a stronger move up than down.
- This setup creates an opportunity for traders to take advantage of a reversal in the stock’s profit-based price appreciation.
Options trading represents the activities of investors seeking to hedge their long positions or speculators seeking to profit from correctly predicting unexpected movements in an underlying stock or index. The choices of these investors imply a forecast for the coming weeks. That’s because options trading is literally a bet on the odds of the market – a bet made by traders who are, on average, more informed than most investors. The key to maximizing this insight is understanding the context in which the pricing behavior occurred. The chart below shows the price action for AT&T’s stock price on Tuesday, July 28, showing the lineup after the earnings report.
The stock’s one-month trend saw stocks close below the 20-day moving average before rising less than 1% on the day of the announcement and continuing incrementally the day after. The price closed in the lower 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 how price has stayed in the lower range. This price movement of AT&T stock implies that investors may be ambivalent about AT&T going forward.
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 10-20 time periods, including two to four weeks of trading on a daily chart.
Chart viewers may recognize that traders expressed concern about earnings, based on the price trend for AT&T falling below the 20-day moving average in early July. Chart watchers can also make sense of investor expectations by paying attention to details about options trading. Prior to the announcement, traders seemed to expect AT&T to move higher after profit.
The Keltner Channel Indicator displays a series of semi-parallel lines calculated from a 20-day simple moving average. 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 .
The recent activity of options traders means they view AT&T stock as undervalued at current levels and have bought call options as a bet that the stock will trade between today and August 20, the next monthly options expiration date. The green boxed box represents the prices offered by the call option sellers. It implies a 70% chance that AT&T stock will close in this range or higher on August 20. So sellers are only slightly bullish. However, buyers are picking up on these prices, suggesting that buyers view these options as too expensive. Since the pricing only represents a 30% chance that prices could close above this green box, it seems buyers are willing to take those long odds.
It’s important to note that open interest on Wednesday contained nearly 1.8 million call options compared to just over 1 million put options, demonstrating the bias option buyers had as traders favored calls over calls. puts of almost 2-to-1. This normally implies that options traders expect an upward price movement.
After earnings, volatility has decreased dramatically, but the number of open interest put options has decreased and the number of call options has increased. This indicates that call options are being bought rather than sold, creating a bullish sentiment. For the attacks on the money and one step in either direction, the bubble volume far outweighs the put volume. The volume of out-of-the-money put options is falling much faster than the volume of out-of-the-money calls, meaning more traders believe AT&T stock prices will rise than those who believe stock prices will fall .
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 together with plenty of room to spin in either direction. This suggests that option buyers do not have strong convictions about how the company will develop in the weeks following the report. While investors and options traders expected positive movement from the report, the stock price moved less distance than after the last earnings report.
These support and resistance levels show a wide range of support and resistance for prices. As a result, it is possible that major movement in both directions could take place in the near future. After the previous earnings announcement, AT&T shares were up 4.1% that day and gradually declined the following week. Investors may expect an opposite price movement in the week following this announcement. With a lot of room in the volatility range, stock prices could rise or fall more than expected in the near term; however, there is more room in the volatility range to support an upward move.
AT&T beat analysts’ forecasts for earnings per share and revenue. The absolute burst of analyst expectations of additional postpaid subscribers was not immediately reflected in AT&T’s stock price; however, options traders have bought calls and sold puts, reflecting bullish sentiment. However, this activity offers more room in the volatility range for upward movement in the stock price in the future.