Investors have bid up the share prices of Affirm Holdings, Inc. (AFRM) ahead of the company's fiscal fourth quarter earnings announcement. At first glance, it appears that option traders are positioned for a positive move, as there are a growing number of call options in the open interest. The unusual option activity could create a strong upward trend in the price action if Affirm delivers a positive earnings surprise.
The open interest for AFRM shows an increasing number of call options, and option premiums are unusually high right now. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings report. If these bets were to unwind, it could create unforeseen downward pressure on the share price of AFRM.
It is challenging to accurately predict the direction a stock will move after earnings. However, a comparison between the stock's price action and option activity shows that, if Affirm Holdings delivers a negative report, the company's share price could fall, moving closer to its 20-day moving average after the announcement. This could happen because options are priced for an upward move, but unforeseen poor news could catch traders off guard and create a rapid decline in share price.
- Traders and investors have bid up the share price to an extreme range ahead of the earnings report.
- The share price has recently been closing well above its 20-day moving average.
- Call and put pricing is predicting a stronger move to the upside.
- The volatility-based support and resistance levels allow for a stronger move to the downside.
- This setup creates an opportunity for traders to profit from an unexpected earnings result.
A comparison between the details of both stock price and option behavior can grant chart watchers valuable insight; however, it is necessary to understand the context in which this price behavior took place. The chart below depicts the price action for the AFRM share price as of Sept. 8. This created the setup leading into the earnings report.
Over the past month, the trend for AFRM stock has the share price briefly falling below the 20-day moving average before rising to the top extremes of the volatility range, after it was announced that AFRM was working on a payment system with Amazon.com, Inc. (AMZN). In this time period, it's notable that the lowest AFRM share price was roughly $61 in mid-August, whereas the highest share price was $100 in late August. The price closed in the upper region depicted by the technical studies in this chart.
The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has risen above the 20-day moving average in the week before earnings. This price move from AFRM shares implies that investors' confidence is growing as the earnings report approaches.
The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.
In this context where the price trend for AFRM has closed above its 20-day moving average, chart watchers can recognize that traders and investors are expressing growing confidence going into earnings. It's notable that, in the week before earnings, AFRM's share price has retreated a little, as investors take profits after the Amazon-related run-up. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for favorable earnings or not.
Option trading details can provide chart watchers with additional context to help them form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a wide margin. On Wednesday, there were over 34,000 calls traded opposed to over 11,000 puts. Normally, this volume indicates that traders are feeling bullish toward the earnings report.
The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.
Option traders recognize that AFRM shares are in an extreme range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and Sept. 10, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 40% probability that AFRM shares will close inside this range by the end of the week if prices go higher. The red box represents the pricing for put options with a 26% chance if prices go lower on the announcement.
It is necessary to note that the open interest featured over 159,000 calls to over 96,000 puts, demonstrating the bias that option traders had, as traders favored puts over calls. The implied volatility for puts has been falling, indicating that traders are selling these options. This reflects a bullish sentiment around AFRM earnings. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of purchased call options has only mildly skewed expectations higher. A far more complacent outlook is implied.
The purple lines on the chart are generated by a 10-day Keltner Channel study set at 4 times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.
The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run either way, but with more room to the downside. This suggests that option buyers don't have a strong conviction about how the company will report, even though recent call volumes outweigh put volume. Although investors and option traders do not expect it, a surprising report could push prices dramatically higher or lower.
These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, AFRM shares fell 2.7% the day after earnings and continued to fall the following week. Investors may be expecting a dissimilar move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
AFRM could hardly be considered a bellwether stock, so it is unlikely that its earnings report will affect indexes directly. It could, however, have an impact on stocks in the information technology services industry. A positive report could lift other stocks in the industry such as Fiserv, Inc. (FISV), Infosys Limited (INFY), or Gartner, Inc. (IT). It could also affect exchange traded funds (ETFs) such as the ETFMG Prime Mobile Payments ETF (IPAY), the Innovator Loup Frontier Tech ETF (LOUP), or the Global X FinTech ETF (FINX).