Investors of Coinbase Global, Inc. (COIN) 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 positive move, as the number of call options in the open interest outweighs the number of puts. The unusual option activity could create a strong downward trend in the price action if COIN delivers a negative earnings surprise.
A growing number of call options remain the open interest for COIN, and option premiums are currently at an usually elevated level. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a favorable earnings report. If these bets were to unwind, it could result in unforeseen downward pressure on the share price of Coinbase.
Correctly 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 COIN delivers a negative report, the company's share price could decline significantly, moving further below its 20-day moving average after the announcement. This could happen because options are priced for an upwards move, but unforeseen poor news could catch traders off guard and create a rapid decline in share price.
- Traders and investors have kept the Coinbase share price range bound headed into the earnings report.
- The share price has recently closed 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 downwards.
- 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 illustrates the price action for the COIN share price as of Thursday, Aug. 5. This created the setup leading into the earnings report.
Over the past month, the trend for COIN stock has the share price falling below and rising above the 20-day moving average. In this time period, it's notable that the lowest COIN share price was roughly $213 in mid-July, whereas the highest share price was nearly $258 in early August. 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 risen above the 20-day moving average in the week before earnings. This price move from COIN 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 COIN has recently risen 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, COIN's share price broke its recent trend and rose above the 20-day moving average. That makes it important for chart watchers to determine whether the move is reflecting inventors' 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 noticeable margin. On Thursday, there were over 97,000 calls traded opposed to over 34,000 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 COIN shares have broken the trend and risen above the 20-day moving average, and they 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. 13, the Friday after earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 36% probability that COIN 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 32% chance if prices go lower on the announcement.
It is necessary to note that the open interest featured over 210,000 call options compared to over 160,000 puts, demonstrating the bias that option buyers had, as traders favored calls over puts. It's notable that over 97,000 calls and over 34,000 puts were traded on Thursday, skewing the open interest numbers even further in favor of call options. However, because the call box and put box are relatively equal in size, it tells us that the growing percentage of 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 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 way, but with slightly 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 would 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, Coinbase shares fell by 2.5% the day after earnings and continued to fall the following week. Investors may be expecting a different move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
Coinbase is still a relatively new stock, having IPO-ed less than a year ago, so its earnings likely won't have a direct impact on indexes. No matter what the report says, it could have a significant impact on stocks in the software industry. A positive report could lift other stocks in the sector such as Shopify Inc. (SHOP), PayPal Holdings, Inc. (PYPL), or Square, Inc. (SQ). It could also affect exchange traded funds (ETFs) such as the Simplify Volt Fintech Disruption ETF (VFIN) or VanEck Vectors Digital Transformation ETF (DAPP).