Pessimistic investors have bid down the share price of BlackRock, Inc. (BLK) ahead of the investment manager's fiscal third quarter earnings announcement. Upon first look, it appears that option traders are positioned for a negative move, as put options outnumber calls in the open interest more than two-to-one. The unusual option activity could create a strong downward trend in the price action if BlackRock delivers a negative earnings surprise.
The open interest for BLK shows a large number of put options, and option premiums are unusually high right now. Trading volumes indicate that traders have been buying puts and selling calls in anticipation of a negative earnings result. If these bets were to unwind, it could place unforeseen upward pressure on the share price of BlackRock.
Accurately predicting the direction a stock will move after earnings is difficult. However, a comparison between the stock's option activity and price action shows that, if BlackRock delivers a positive report, the company's share price could rise, moving closer to its 20-day moving average after the announcement. This could happen because options are priced for a downward move, but unexpected good news could catch traders by surprise and create a rapid rise in share price.
- Traders and investors have bid down the share price ahead of the earnings report.
- The share price has recently been closing 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 stronger move to the upside.
- This setup creates an opportunity for traders to profit from an unexpected earnings result.
Chart watchers can gain valuable insight from a comparison between the details of both stock price and option behavior. However, it is necessary to understand the context in which this behavior took place. The chart below depicts the price action for the BlackRock shares as of Oct. 11. This created the setup leading into the earnings announcement.
Over a one-month period, BlackRock stock has been on a relative downward trend, consistently closing below its 20-day moving average. In this time period, it's notable that the highest BlackRock share price was roughly $915 in mid-September, whereas the lowest share price was $825 in early October. The price closed in the lower 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 fallen below the 20-day moving average in the week before earnings. This price move from BlackRock shares implies that investors' confidence is waning 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 BlackRock has closed below its 20-day moving average for over a month, chart watchers can recognize that traders and investors are expressing growing pessimism going into earnings. It's notable that, in the week before earnings, BlackRock's share price appears to have found a new support level. 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 narrow margin. On Monday, there were nearly 3,000 calls traded opposed to over 2,300 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 BlackRock shares are in a below 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 Oct. 15, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 38% probability that BlackRock 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 34% chance if prices go lower on the announcement.
It is necessary to note that the open interest featured over 19,000 calls to over 47,000 puts, demonstrating the bias that option traders had, as traders favored puts over calls. Implied volatility for puts has been rising, indicating that traders are buying these options. This expresses a bearish sentiment around BlackRock earnings. However, because the call box and put box are relatively equal in size, it tells us that the higher percentage of put options has only mildly skewed expectations lower.
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 upside. This suggests that option buyers don't have a strong conviction about how the company will report, even though the open interest skews heavily toward puts. 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, BlackRock shares fell 3% the day after earnings and continued to fall the following week. Investors may be expecting a similar move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
Banks kick off earnings season and can provide a glimpse into overall economic performance for the quarter, as well as a forecast of investor expectations for the near future. Although BlackRock is not a bank, it is the world's largest asset manager, so it's quite possible the report could affect indexes directly.
No matter what the report says, it's likely to have an effect on stocks in the financial sector and asset management industry. A positive report could lift other stocks in the industry such as Blackstone Inc. (BX) or Brookfield Asset Management Inc. (BAM). It could also affect exchange traded funds (ETFs) such as State Street's S&P 500 Index ETF (SPY), Schwab's U.S. Dividend Equity ETF (SCHD), or State Street's Financial Sector ETF (XLF).