Investors of Amgen Inc. (AMGN) have kept the share prices range bound ahead of the company's fiscal second quarter earnings announcement. At first glance, it appears that option traders are positioned for a negative move, as the number of put options are growing in the open interest. The unusual option activity could create a strong upward trend in the price action if Amgen delivers a positive earnings surprise.
A growing number of put options remain in the open interest for AMGN, and option premiums are unusually high right now. Trading volumes indicate that traders have been selling calls and buying puts in anticipation of an unfavorable earnings report. Unwinding these bets could result in unexpected upward pressure on the share price of Amgen.
Correctly predicting the direction a stock will move following earnings is difficult. However, a comparison between the stock's price action and option trading activity shows that, if AMGN delivers a positive report, the company's share price could rise significantly, moving closer to its 20-day moving average after the announcement. This is possible because options are priced for a move downwards, but unexpected good news could catch traders by surprise and create a rapid rise in share price.
- Traders and investors have kept Amgen's share price range bound headed into the earnings announcement.
- The share price has been closing just below its 20-day moving average.
- Call and put pricing is predicting a stronger move to the downside.
- The volatility-based support and resistance levels allow for a slightly stronger move upwards.
- This setup creates an opportunity for traders to profit from an unexpected earnings outcome.
By comparing the details of both stock price and option behavior, chart watchers can gain valuable insight, although it is imperative to understand the context in which this price behavior took place. The chart below depicts the price action for the AMGN share price as of Friday, July 30. This created the setup leading into the earnings announcement.
The one-month trend of AMGN stock has the shares remaining in the middle of the volatility range before falling to rest just below the 20-day moving average. Over the past month, it's notable that the lowest AMGN share price was near $241 in late June, whereas the highest share price was nearly $250 in mid-July. The price closed in the middle region depicted by the technical studies on 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 fallen below the 20-day moving average in the week before earnings. This price move from Amgen shares implies that investors expect a negative earnings result.
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 AMGN has remained in an average range, chart watchers can recognize that traders and investors are expressing ambivalence going into earnings. However, it is notable that, in the week before earnings, AMGN's share price fell from its monthly high, falling below the 20-day moving average a few days before the report. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for unfavorable earnings or not.
Option trading details can provide additional context to assist chart watchers in forming an opinion about investor expectations. Recently, option traders are favoring puts over calls by a slim margin, yet the open interest on options has a slightly larger number of puts than calls. Normally, this volume suggests that investors are expecting a positive earnings report, but the recent option volumes speak otherwise, as recent order sentiment is bearish.
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 Amgen shares are in an average 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 Aug. 6, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 37% chance that Amgen shares will close inside this range by the end of the week if prices go higher. The red box represented the pricing for put options with a 35% probability if prices go lower on the announcement.
It's important to note that the open interest featured over 83,000 active call options compared to roughly 58,000 put options, demonstrating the bias that option buyers had, as the majority of the trades were call options. This amount normally implies that call option traders expect a rise in price; however, the past five days have shown rising put option volume and implied volatility falling for call options, which signifies that these options are being sold. Because the call box and put box are relatively equal in size, however, it tells us that the higher percentage of put options traded has only mildly skewed expectations lower. A far more complacent outlook is implied.
The purple lines on the chart are generated by a 10-day Keltner Channel study set at four 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 downwards or upwards. This suggests that option buyers don't have a strong conviction about how the company will report, even though put volume is rising. 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, AMGN shares fell by 7.2% the day of earnings before rising the following week. Investors may be expecting the same kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
AMGN shares typically make mild moves after earnings, so the results likely won't have a direct impact on indexes. However, no matter what the report says, it will likely have a significant impact on stocks in the health care sector. A positive report could lift other stocks in the sector such as Johnson & Johnson (JNJ), Pfizer Inc. (PFE), or AbbVie Inc. (ABBV). It could also affect exchange traded funds (ETFs) such as State Street's Health Care Sector ETF (XLV) or Invesco's Dynamic Pharmaceuticals ETF (PJP).