Trading On margin

Verizon (VZ) Options Traders Prepare for Pop After Profits


While investors maintained the share price range linked to Verizon Communications Inc. (VZ) ahead of the announcement of its fiscal second quarter results, they also provided a near-term uptrend. On the surface, it appears that options traders are positioned to anticipate a positive move, as there has been an increasing number of out-of-the-money call options in open interest. Unusual options trading can create a strong uptrend in price action if Verizon offers a positive earnings surprise.

A large collection of call options remains in the open interest for VZ, and option premiums are unusually high at this time. Trading volumes indicate that traders have bought calls and sold puts in anticipation of a positive earnings report. The outcome of their bets could put downward pressure on the price of VZ.

It is difficult to predict with precision the direction a stock will take after profits. However, a price action comparison between stock prices and options trading activity shows that if the company provides a negative report, VZ shares could drop significantly, approaching the moving average. 20 days in the first days after the announcement. This could happen because options are priced for a small movement, but unexpected bad news could surprise traders and create a rapid drop in prices.

Key points to remember

  • Traders and investors kept the stock price in a relatively narrow range ahead of the announcement.
  • The price closed just above its 20-day moving average.
  • The prices of the put and call options predict a stronger bullish movement.
  • Support and resistance levels based on volatility allow movement in either direction.
  • This setup creates an opportunity for traders to profit from an unexpected outcome.

Options trading represents the activities of investors who wish to protect their positions or speculators who wish to profit from correctly forecasting unexpected movements of an underlying stock or index. This means that options trading is literally a bet on the odds of the market. By comparing the details of the price behavior of stocks and options, chart watchers can gain valuable insight, although it helps to understand the context in which that price behavior took place. The graph below illustrates the development of the VZ share price on Tuesday morning. This created the setup leading up to the revenue report.

Current trends

The one-month trend of the stock keeps stocks in a fairly narrow range. It is worth noting that over the past month, the highest VZ stock price was around $ 57 in mid-July and the lowest stock price was around $ 55 on next day. Price closed in the middle region represented by the technical studies on this chart.

The studies consist of indicators of the Keltner canal at 20 days. These describe price levels that represent a multiple of the Average True Range (ATR) for the stock. This chart helps to highlight how the price has moved, but has mostly stayed in an average range throughout the month. This movement in the price of VZ shares implies that investors expect little change from the next report.

advice

the Average True Range (ATR) has become a standard tool for describing historical volatility over time. The typical average duration used in its calculation is 10 to 20 periods, which includes two to four weeks of trading on a daily chart.

Against this backdrop where the price trend of VZ has been maintained within a medium range, chart watchers may recognize that traders and investors are expressing profit complacency. In the week leading up to the results, the stock price gradually rose, falling below the 20-day moving average the following week. It is therefore important for chart watchers to determine whether the movement reflects investors’ expectations for a favorable earnings report or not.

The details of options trading may provide additional information to help chart watchers form an opinion on investor expectations. Recently, options traders have favored calls over puts, as open interest on options has a higher number of calls than puts. This normally suggests that investors are waiting for good news from the company’s report. However, under these circumstances traders seem to expect VZ not to move strongly, up or down, after profits.

advice

the Keltner channel indicator displays a set of semi-parallel lines calculated from the base of a 20-day simple moving average. Since the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting an ATR multiple from the average price, this channel indicator makes a great visualization tool when charting. historical volatility.

Commercial activity

Options traders recognize that VZ stocks are average and have priced their options as a bet that the stock will close in one of the two boxes shown in the chart between today and July 23, the Friday following the publication of the results report. The box framed in green represents the price offered by the call option sellers. This implies a 57% chance that Verizon shares will close in that range by the end of the week if prices go up. The red box represents the price of the put options with a probability of 43% if the prices fall during the announcement.

It is important to note that the open interest had over 476,000 active calls against around 277,000 puts, demonstrating the option buyers bias, as only 36% of trades were puts. This unusually low amount normally implies that call option traders expect prices to rise. However, since the buy box and the sell box are relatively equal in size, this tells us that the high percentage of calls traded did not skew expectations. This circumstance implies a much more complacent view.

The purple lines on the graph are generated by a 10 day Keltner Channel study set at 4 times the ATR. This metric tends to create highly correlated regions of strong support and resistance in price action. These regions appear when the channel lines make a noticeable turn during the previous three months.

The levels that the bends mark are annotated in the table below. What’s remarkable about this chart is that the buy and sell prices are in such a narrow range with plenty of room on either side to function. This suggests that option buyers do not have a strong belief in how the company will report, even if calls are replaced by puts. While investors and options traders might not expect it, a surprising report would push prices significantly higher or lower.

These support and resistance levels show a wide range of support and resistance for the price. As a result, it is possible that any news, surprisingly bad or good, will surprise investors and could generate an unusually large movement.

Following the previous earnings announcement, VZ shares fell 1.5% the next day and continued to decline the following week, before finally exceeding the pre-profit price the following week. Investors can expect the same kind of small price movement after this announcement. With plenty of room in the volatility range, stock prices could rise or fall more than expected.

Market impact

Verizon shares typically move slightly after earnings, so the outcome does not directly affect the index’s prices. However, no matter what the report says, it will likely have a significant impact on stocks in the communications services industry.

A positive report could lift other industry stocks such as AT&T Inc. (T), T-Mobile US, Inc. (TMUS) or Comcast Corporation (CMCSA). It would also affect exchange-traded funds (ETFs) such as the State Street Communication Services Industry Index ETF (XLC) and potentially the State Street S&P 500 Index ETF (SPY).


Comment here

placeholder="Your Comment">