Investors of Exxon Mobil Corporation (XOM) have expressed doubts by bidding on the stock price ahead of the announcement of its fiscal second quarter earnings. At first glance, it appears that options traders are predicting a positive move as there are a large number of call options open. The unusual options trading could trigger a strong uptrend in the price action if XOM delivers a favorable earnings surprise.
A significant number of call options remain open to Exxon Mobil and option premiums are currently unusually high. Trading volumes and implied volatility indicate that traders have bought calls and sold puts in preparation for a positive earnings report. Settling these bets could cause unexpected downward pressure on XOM’s share price.
It is difficult to correctly predict the direction of a stock after earnings. However, a comparison between the stock’s price action and options trading shows that if XOM delivers a negative earnings report, the company’s stock price could drop significantly, pushing it closer to its 20-year moving average in the days following the announcement. days would come. This can happen because options are priced for an 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 lowered Exxon Mobil’s stock prices to a below-average range stated in the earnings report.
- The share price recently closed below the 20-day moving average.
- Call and put prices expect a stronger increase.
- The volatility-based support and resistance levels are driving stronger upward movement.
- This setup creates an opportunity for traders to take advantage of unexpected profit results.
Options trading represents the activities of investors seeking to protect their positions or speculators seeking to profit from accurately predicting the unexpected movements in an underlying stock or index. That makes options trading a literal gamble on market opportunities. By comparing the details of stock prices and option behavior, chart watchers can gain valuable insights, although it is helpful to understand the context in which this price behavior occurred. The chart below illustrates the price action for the XOM stock price as of Wednesday morning, July 28. This led to the lineup that led to the earnings report.
The one-month trend of XOM stocks causes the stock to fall below the 20-day moving average and drop to the bottom third of the volatility range. In the past month, it’s worth noting that the XOM stock’s low was about $55 in mid-July, while its high was about $64 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 show how the price moved to a lower range in the week before the profit. This price movement of XOM shares implies that investors expect a negative 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 XOM has fallen below the average range, chart viewers can recognize that traders and investors are not expressing much optimism about earnings. In the week before the earnings, XOM’s stock price fell to a month-long low before moving closer to the 20-day moving average. That makes it important for chart watchers to determine whether the move reflects investors’ expectations for favorable earnings or not.
Details on options trading can provide additional context to help chart watchers form an opinion about investor expectations. Recently, wide margin options traders have favored calls over puts, with calls bought almost 6-to-1 over puts Wednesday morning. Normally, this suggests that investors expect a positive earnings report and traders seem to expect XOM 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 XOM stocks are in a moderate 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 39% chance that Exxon Mobil 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 39% probability if prices move lower at the time of the announcement.
It is important to note that open interest contained more than 870,000 active call options compared to approximately 573,000 put options, demonstrating the bias that option buyers had. That more than 60% 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 skewed high 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 together with plenty of room to run upwards compared to downwards. 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, XOM shares rose 2.76% the following day and continued to rise the following week. Investors may expect a similar movement in the price after this announcement. With enough room in the volatility range, stock prices could rise or fall more than expected.
XOM stocks typically make small moves after gains, so the result is unlikely to cause index prices to rise immediately. But whatever the report says, it will likely have a direct impact on energy sector stocks. A positive report could boost other stocks in the sector, such as Chevron Corporation (CVX) or BP PLC (BP). It would also affect exchange-traded funds (ETFs), such as State Street’s Energy Sector Index ETF (XLE) and possibly State Street’s S&P 500 Index ETF (SPY).