EBay Inc. investors (EBAY) cut the share price to a below-average range prior to the announcement of the results for the second fiscal quarter. At first glance, it seems that options traders are positioned for negative move as the number of Put options by doing open interest outweighs the number of Calls. The unusual option activity could trigger a strong uptrend in price action if EBAY delivers a positive earnings surprise.
A significant number of put options remain in the open interest of EBAY, and Option premiums are currently at an unusually high level. The trading volume indicates that traders have bought puts and sold calls in anticipation of an unfavorable earnings report. The resolution of these bets could put unforeseen upward pressure on eBay’s stock price.
Precisely predicting the direction a stock will head after making gains is difficult. However, a comparison between the stock’s performance and option activity shows that if EBAY reports positive, the company’s stock price could rise significantly and approach its 20-day price moving average after the announcement. This could happen because options are being valued for a downward move, but unforeseen good news could surprise traders and cause the stock price to rise rapidly.
The central theses
- Traders and investors have bid the share price down in the earnings report.
- The share price recently closed well below its 20-day moving average.
- Call and put prices predict a stronger downward movement.
- The volatility-based support and resistance levels allow for stronger upward movement.
- This setup offers traders the opportunity to take advantage of an unexpected profit result.
A comparison between the details of the stock price and option behavior can provide chart watchers with valuable insight; however, it is necessary to understand the context in which this price behavior took place. The following graphic illustrates the development of the EBAY share price on August 9th. This created the setup that led to the results report.
Last month, the trend in EBAY stock caused the stock price to hit its all-time high at the top of the volatility range in late July, before falling well below its 20-day moving average to the bottom third of the volatility range days later. During that period, EBAY stock’s lowest price in early August was around $ 65, while its highest stock price in late July was over $ 74, an all-time high. The price closed at the bottom 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 how the price fell below the 20-day moving average in the week leading up to profit. This movement in the price of EBAY stocks suggests that investor confidence is dwindling as the earnings report gets closer.
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, with the price trend for EBAY recently falling below its 20-day moving average, chart watchers can see that traders and investors are expressing growing concerns about earnings. It is noteworthy that the week before earnings, EBAY’s share price fell from its all-time high, closing well below the 20-day moving average. Therefore, it is important for chart watchers to determine whether or not the move reflects investors’ expectations for adverse earnings.
Options trading details can provide chart watchers with additional context to help them form an opinion about investor expectations. Lately, options traders have favored puts with a small margin over calls. Over 31,000 puts were traded on Monday versus over 15,000 calls. Usually this volume indicates that traders are pessimistic about the earnings report.
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 acknowledge that EBAY stocks are below average and have valued their options as a bet that the stock will close within either of the two boxes shown in the chart between today and August 13, 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 35 percent chance that eBay stocks 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 35% chance if prices go down when announced.
It is important to note that the open interest had over 120,000 calls compared to nearly 164,000 puts, demonstrating the bias of option buyers as traders favored puts over calls. Notably, over 31,000 puts and over 15,000 calls were traded on Monday, further skewing the open interest numbers in favor of put options. However, since the call box and the put box are relatively the same size, it shows that the growing percentage of call options has only slightly skewed expectations. A far more complacent outlook is implied.
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 tight range, with a lot of headroom in either direction, but with more headroom. This suggests that option buyers are not firmly convinced of how the company will report, even though recent put volumes outweigh the call volume. While investors and options traders don’t expect this, a surprise report would 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, EBAY stocks fell 10% the day after the gains before gradually rising over the following week. Investors may expect similar price developments following this announcement. With plenty of leeway in the area of volatility, stock prices could rise or fall more than expected.
eBay stocks tend to make significant price movements after winning, so it is possible that the results could have a direct impact on the indices. No matter what the report says, it could affect internet retail stocks. A positive report could be other stocks in the sector like Etsy, Inc. (ETSY), Wayfair Inc. (W.) or MercadoLibre, Inc. (MELI). It could have an impact too exchange traded funds (ETFs) such as the First Trust NASDAQ Retail ETF (FTXD), Invesco’s QQQ Trust ETF (QQQ) or State Street’s S&P 500 ETF Trust (SPY).