Optimistic investors have seen the stock prices of Moderna, Inc. (MRNA) to an extreme range ahead of the announcement of the company’s second-quarter fiscal results. At first glance, options traders appear to be poised for a positive move as more and more call options are being bought and put options are being sold in open interest. This unusual option activity could trigger a strong downward trend in price action if MRNA yields a negative earnings surprise.
A significant number of call options bought and put options sold remain open to MRNA, 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 favorable earnings report. If these bets were to expire, it could lead to unexpected downward pressure on MRNA’s stock price.
It is difficult to accurately predict in which direction a stock will move after earnings. However, a comparison between the stock’s price action and options trading shows that if MRNA delivers a negative report, the company’s stock price could drop significantly, bringing it closer to the 20-day moving average after the report. . This can happen because options are priced for a rise, 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 significantly increased Moderna’s share price towards the earnings announcement.
- The stock price recently closed at the upper extremes of the volatility range.
- 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 an unexpected profit result.
By comparing the details of both stock price and option behavior, chart watchers can gain valuable insights, although it is imperative to understand the context in which this price behavior occurred. The chart below illustrates the price action for the MRNA stock as of Tuesday, Aug. 3. This created the lineup that led to the earnings announcement.
The one-month trend of MRNA stocks is pushing the stock price to the extremes of the volatility range, mainly due to the stock’s addition to the S&P 500 and the ongoing necessary coronavirus vaccinations. In the past month, the lowest price of MRNA stock was about $215 in early July, while the highest share price was close to $387, a record high in early August, just two days before the announcement.
The price closed in the top of 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 matrix helps to show how the price has risen well above the 20-day moving average in the week before the gains. This price movement of MRNA stocks implies that investors are extremely optimistic about earnings.
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 MRNA has remained in an extremely high range, card viewers can recognize that traders’ and investors’ confidence in earnings is growing. Notably, in the week before earnings, MRNA’s stock price rose to its all-time high. 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 card readers form an opinion about investor sentiment. Recently, options traders with a decent margin have favored calls over puts. Normally, this volume suggests that traders expect a positive earnings report; however, it is necessary to understand the context of this book.
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 MRNA stocks have risen to an extreme range and have priced their options as a bet that the stock will close within one of two boxes on the chart between today and Aug. 6, 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 38% chance that Moderna 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 31% probability if prices move lower at the time of the announcement.
It is necessary to note that the open interest contained more than 258,000 call options, compared to approximately 286,000 puts. At first glance, this would illustrate that option buyers preferred puts over calls. However, as the implied volatility of the put option goes down, it can be concluded that traders are selling these options rather than buying them. This means that options traders expect a rise in the share price. However, because the call box and the put box are relatively the same size, it tells us that the high percentage of put options sold has only slightly boosted expectations.
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 down. This suggests that option buyers do not have strong convictions about how the company will report, even though the call volume is greater than the volume placed. 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, MRNA stocks rose 1.65% the day after earnings, falling 2.8% the following day and falling further the following week. Investors can expect a different kind of price movement after this announcement. With enough room in the volatility range, stock prices could rise or fall more than expected.
Moderna is one of the largest providers of the COVID-19 vaccine and a new entrant to the S&P 500, so earnings results could directly impact the indexes. Whatever the report says, it will likely have a noticeable effect on healthcare stocks. A positive report could boost other stocks in the industry, such as Johnson & Johnson (JNJ), Pfizer Inc. (PFE) or Eli Lilly and Company (LLY). It can also affect exchange traded funds (ETFs), such as State Street’s S&P 500 Index ETF (SPY) and Invesco’s QQQ Trust ETF (QQQ).