Investors of Dominion Energy, Inc. (D) have kept the share prices range bound ahead of the company's fiscal second quarter earnings report. At first glance, it appears that option traders are prepped for a positive move, as the number of call options is growing in the open interest. The unusual option activity could create a strong upward trend in the price action if Dominion delivers a positive earnings surprise.

A growing number of call options remain in the open interest for Dominion Energy, 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 Dominion Energy.

Accurately predicting the direction a stock will move after reporting earnings is difficult. However, a comparison between the stock's option activity and price action shows that, if Dominion delivers a negative report, the company's share price could decline significantly, moving below its 20-day moving average after the report. This could happen because options are priced for a move upwards, but unexpected poor news could catch traders by surprise 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 recently closed 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 downwards.
  • This setup creates an opportunity for traders to profit from an unexpected earnings outcome.

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 Dominion Energy share price as of the market close on Wednesday, Aug. 4. This created the setup leading into the earnings report.

Earnings pricing for Dominion Energy, Inc. (D)

Current Trends

Over the past month, the trend for Dominion stock has remained in the middle of the volatility range, while rising above and below the 20-day moving average. In this time period, it's notable that the lowest D share price was roughly $74 in early July, whereas the highest D share price of the same time period was around $78 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 Dominion shares implies that investors are wary about the earnings report.

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 Dominion has remained in an average range, chart watchers can recognize that traders and investors are expressing ambivalence going into earnings. It is notable that the share price has twice risen well above the 20-day moving average, only to fall back to that level. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations regarding earnings.

Option trading details can provide additional context to help chart watchers form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a slim margin, even though the open interest has a slightly larger number of puts than calls. Normally, this volume indicates that traders are slowly changing their expectations toward the 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 Dominion shares have remained 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. 13, 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 Dominion 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 31% probability if producers go lower on the announcement. 

It is imperative to note that the open interest featured over 33,800 calls compared to 34,500 puts. However, it is notable to add that, on Wednesday, call option volume outweighed puts 1.5-to-1, demonstrating the recent bias that option traders have in adding calls versus puts. This could indicate that option buyers are gaining confidence. However, because the call box and put box are relatively equal in size, it tells us that the growing percentage of call options traded is only mildly skewing expectations higher.

Option pricing for Dominion Energy (D)

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 upside. 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.

Volatility pattern for Dominion Energy, Inc. (D)

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, Dominion shares fell by 1.8% the day after earnings and continued to fall for the next several weeks. Investors may be expecting a different 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.

Market Impact

Dominion shares typically make mild moves after earnings, so the report is unlikely to affect indexes directly. However, no matter what the report says, it will likely have a noticeable impact on stocks in the utilities sector. A positive report could lift other stocks in the sector such as NextEra Energy, Inc. (NEE), Duke Energy Corporation (DUK), or Exelon Corporation (EXC). It could also affect exchange traded funds (ETFs) such as State Street's Utilities Sector Fund ETF (XLU) or the VanEck Vectors Uranium+Nuclear Energy ETF (NLR).