Confident Investors in Duke Energy Corporation (DUK) have raised share prices in the company’s second quarter fiscal year earnings report to a higher range. At first glance, it seems that options traders are expecting a negative trend as there is a growing number of Put options by doing open interest. This unusual option activity could trigger a strong uptrend in price action if Duke Energy delivers a positive earnings surprise.
A significant number of put options remain in the open interest of DUK, and Option premiums are currently unusually high. Trading volumes indicate that traders have sold Calls and buying puts in anticipation of an unfavorable earnings report. The resolution of these bets could result in unexpected upward pressure on the DUK share price.
Precisely predicting the direction a stock will head after making gains is difficult. However, a comparison between the stock’s performance and options trading activity shows that if DUK reports positive, the company’s stock price could rise significantly and continue to move beyond its 20-day rate moving average according to the report. This could happen because options are being priced for a downward move, but unexpected good news could take traders off guard and cause the stock price to rise rapidly.
The central theses
- Traders and investors have initiated the share price into the profit announcement.
- The share price recently closed in the upper third of the volatility range.
- Call and put prices predict a stronger downward movement.
- The volatility-based support and resistance levels allow for greater movement on the downside.
- This setup offers traders the opportunity to take advantage of an unexpected profit result.
By comparing the details of the stock price and option behavior, chart watchers can gain valuable insight, although it is imperative to understand the context in which that price behavior occurred. The graphic below illustrates the price development of the DUK share on Wednesday, August 3rd. This created the structure that led to the profit notification.
The one-month trend of the DUK share causes the share price to rise into the upper third of the volatility range. Last month, DUK stock’s lowest price was around $ 98 in early July, while its highest stock price was nearly $ 107 in early August, just two days before the announcement.
The price closed in the upper range represented by the technical studies on this chart. The studies are made up of 20 days Keltner Canal Indicators. These represent price levels that are a multiple of the Average true range (ATR) for the share. This array helps highlight the way the price rose above the 20-day moving average in the week leading up to profit. This movement in the price of DUK shares implies that investors are extremely optimistic about profits.
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 spanning two to four weeks of trading on a daily chart.
In this context, as the price trend for DUK has risen into a higher range, chart watchers can see that the confidence of traders and investors in the profits is growing. It is noteworthy that the price of the DUK share rose to a monthly high in the week before the gains. Therefore, it is important for chart watchers to determine whether or not the move reflects investors’ expectations for a cheap return.
Options trading details can provide additional context to help chart watchers form an opinion on investor sentiment. Lately, options traders have favored puts with a small margin over calls. Usually this volume indicates that traders are expecting a negative earnings report; However, it is necessary to understand the context of this tape.
the Keltner channel display shows a series of semi-parallel lines based on a 20 day simple moving average and a top and bottom line. Since the top lines are drawn by adding a multiple of the ATR to the average and the bottom lines by subtracting a multiple of the ATR from the average price, this channel indicator is a great visualization tool when charting historical volatility.
Options traders recognize that DUK stock has risen to an elevated range and have valued their options as a bet that the stock will close within one of the two boxes shown in the chart between today and August 6, the Friday after the earnings report was released will . The box outlined in green represents the prices offered by call option sellers. This implies a 32 percent chance that DUK stock will close within that range by the end of the week if prices rise. The red box represents the pricing for put options with a probability of 31% if prices fall when the announcement is made.
It is important to note that the open interest was about 40,000 call options compared to about 36,000 puts. At first glance, this would make it clear that option buyers had a tendency to call versus put, which would reflect a bullish sentiment. However, since the call option implied volatility falls, it can be concluded that traders are selling these options rather than buying them. This implies that options traders expect the stock price to decline. However, since the call box and the put box are relatively the same size, this means that the high percentage of call options sold has only pushed expectations down slightly.
The purple lines on the chart are generated from a 10-day Keltner Channel study that was set at four times the ATR. This measure tends to have strongly correlated regions with strong Support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the last three months.
The planes that mark the turns are given in the table below. What is remarkable about this chart is that the call and put prices are in such a narrow range and there is plenty of room for a downward run. This suggests that option buyers are not firmly convinced of how the company will report, even though the call volume outweighs the put volume. While investors and options traders don’t expect this, a surprise report could drive prices up or down dramatically.
These levels of support and resistance represent a wide range of levels of support and resistance for prices. As a result, it is possible that surprisingly bad or good news could surprise investors and spark an unusually large move. According to the previous earnings announcement, DUK shares fell less than 1% the day after the gains, before falling 2.3% the next day and falling further the next week. Investors may expect a similar price movement following this announcement. With plenty of leeway in the area of volatility, stock prices could rise or fall more than expected.
DUK stocks tend to move slightly after gains, so the announcement is unlikely to have a direct impact on the indices. No matter what the report says, it is likely to have an impact on utilities stocks. A positive report could mean other stocks in the sector like NextEra Energy, Inc. (NEE), Dominion Energy, Inc. (D.) or Sempra (SRE). It could have an impact too exchange traded funds (ETFs) such as State Street’s Utilities Sector ETF (XLU) or the VanEck Vectors Uranium + Nuclear Energy ETF (NLR).