Investors of ConocoPhillips (COP) have kept the share prices range bound ahead of the company's fiscal second quarter earnings announcement. At first glance, it seems 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 trading may create a strong upward trend in the price action if COP delivers a positive earnings surprise.

A growing number of call options remain the open interest for COP, and option premiums are unusually elevated 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 result in unforeseen downward pressure on the share price of ConocoPhillips.

Accurately predicting the direction a stock will move following earnings is difficult. However, a comparison of the stock's price action and option trading activity shows that, if COP delivers a negative report, the company's share price could fall significantly, moving further below its 20-day moving average after the announcement. This is possible because options are priced for an upwards move, but unexpected poor news could catch traders off guard and create a swift decline in share price.

Key Takeaways

  • Traders and investors have kept the 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 upside.
  • The volatility-based support and resistance levels allow for a 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 COP shares as of July 30. This created the setup leading into the earnings announcement.

Earnings pricing for ConocoPhillips (COP)

Current Trends

The one-month trend of COP stock has the shares in the middle of the volatility range, falling below the 20-day moving average. Over this time period, the lowest COP share price was roughly $52 in mid-July, whereas the highest share price was nearly $63 in early 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 risen to a middle range in the week before earnings. This price move from COP shares implies that investors expect a negative earnings result.

Tip

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 COP has remained in an average range but has recently risen toward the 20-day moving average, chart watchers can recognize that traders and investors are expressing optimism going into earnings. However, it is notable that, in the week before earnings, COP's share price has been gradually climbing, moving closer to 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 favorable 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 calls over puts. Normally, this volume suggests that investors are expecting a positive earnings report.

Tip

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.

Trading Activity

Option traders recognize that COP shares are average 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 40% chance that COP 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 nearly 192,000 active call options compared to roughly 153,000 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. It is important to note, however, that implied volatility has been falling for put options but rising for calls, signaling that traders are selling puts and buying calls. Because the call box and put box are relatively equal in size, it tells us that the higher percentage of put options traded has only mildly skewed expectations lower. A far more complacent outlook is implied.

Option pricing for ConocoPhillips (COP)

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 call are being purchased over puts. Although investors and option traders do not expect it, a surprising report could push prices dramatically higher or lower.

Volatility pattern for ConocoPhillips (COP)

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, COP shares rose by 5.5% the day of earnings and continued to rise 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.

Market Impact

COP shares typically make significant moves after earnings, so the results may have a direct impact on indexes. However, no matter what the report says, it will likely affect stocks in the energy sector. A positive report could lift other stocks in the sector such as Chevron Corporation (CVX), BP p.l.c. (BP), or TotalEnergies SE (TTE). It could also affect exchange traded funds (ETFs) such as State Street's Energy Sector ETF (XLE) or iShares' U.S. Oil & Gas Exploration & Production ETF (IEO).