The Wendy’s Company investors (WHOM) capped the stock price range prior to the announcement of the second quarter results. At first glance, it seems that options traders are positioned for positive move as the number of Call options increases in open interest. The unusual option activity could trigger a sharp downtrend in price action if WEN delivers a negative earnings surprise.
Call option numbers are growing in open interest for WEN, and Option premiums are currently unusually high. Trading volumes indicate that traders have bought and sold calls lays in anticipation of a favorable earnings report. Should these bets be resolved, it could create unexpected downward pressure on WEN’s share price.
Properly predicting the direction a stock will head after making earnings is a challenge. However, a juxtaposition of the stock’s option activity and its performance shows that if WEN reports negative, the company’s stock price could fall and further fall below its 20-day mark moving average after the announcement. This can happen because options are valued for an upward move, but unforeseen bad news could surprise traders and result in a rapid decline in the stock price.
The central theses
- Traders and investors have held the stock price range before the earnings report.
- The stock price recently closed below its 20-day moving average.
- Call and put prices predict a stronger upward movement.
- The volatility-based support and resistance levels allow for stronger move upward.
- 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 chart below shows the development of the WEN share price on Monday, August 9th. This created the list that led to the results report.
Over the past month, the trend in WEN stock has caused the stock price to rise above and below the 20-day moving average. It is noteworthy during this period that the lowest price for WEN’s stock in mid-July was around $ 21, while its highest stock price was above $ 23 in late July. The price closed in the mid-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 how the price fell below the 20-day moving average in the week leading up to profit. This movement in the price of WEN stock 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 WEN price trend falling below its 20-day moving average recently, chart watchers can see traders and investors are expressing increasing concerns about earnings. It is noteworthy that in the week leading up to earnings, WEN’s stock price broke its recent trend and fell below the 20-day moving average. Therefore, it is important for chart watchers to determine whether or not the move reflects investors’ expectations for cheap earnings.
Options trading details can provide chart watchers with additional context to help them form an opinion about investor expectations. Lately, options traders have been favoring calls over puts by a considerable margin. Almost 3,000 calls were traded on Monday, versus fewer than 700 puts. 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 are realizing that WEN stock has broken its trend and fallen below the moving average, and they have valued their options as a bet that the stock will be within either of the two on the chart between today and August 13th, Friday The box closes after the results report has been published. The box outlined in green represents the prices offered by call option sellers. This implies a 40% chance that WEN 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 33% probability if prices go down when announced.
It is important to note that the open interest had nearly 64,000 calls compared to over 45,000 puts, demonstrating the bias of option buyers as traders favored calls over puts. Notably, almost 3,000 calls and fewer than 700 puts were traded on Monday, further skewing the open interest numbers in favor of call options. However, since the call box and the put box are relatively the same size, this 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 narrow range, with a lot of headroom in either direction, but with a little more headroom. This suggests that option buyers are not firmly convinced of how the company will report, even though recent call volumes outweigh the put 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, WEN shares rose less than 1% the day after the gains and continued to rise the following week. Investors may expect more positive price action after this announcement. With plenty of leeway in the area of volatility, stock prices could rise or fall more than expected.
Wendy’s isn’t the largest stock by market cap, so its earnings are unlikely to have a direct impact on the indices. No matter what the report says, it could impact restaurant stocks. A positive report could mean other stocks in the sector like Wingstop Inc. (WING), Shake Shack Inc. (SHAK) or Jack in the Box Inc. (JACK). It could have an impact too exchange traded funds (ETFs) such as the iShares Core S&P Mid-Cap ETF (IJH) or the AdvisorShares Restaurant ETF (EATZ).