Confident investors of Duke Energy Corporation (DUK) have bid up the share prices to an elevated range going into the company's fiscal second quarter earnings report. At first glance, it appears that option traders are anticipating a negative move, as there are a growing number of put options in the open interest. This unusual option activity could create a strong upward trend in the price action if Duke Energy delivers a positive earnings surprise.

A sizable number of put options remain in the open interest for DUK, 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 DUK.

Accurately predicting the direction a stock will move after earnings is difficult. However, a comparison between the stock's price action and option trading activity shows that, if DUK delivers a positive report, the company's share price could rise significantly, moving further above its 20-day moving average after the report. This could happen because options are priced for a move downwards, but unexpected good news could catch traders off guard and create a rapid rise in share price.

Key Takeaways

  • Traders and investors have bid up the share price headed into the earnings announcement.
  • The share price has recently been closing in the top third of the volatility range. 
  • 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 downside.
  • This setup creates an opportunity for traders to profit from an unexpected earnings result.

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 illustrates the price action for the DUK shares as of Wednesday, Aug. 3. This created the setup leading into the earnings announcement.

Earnings pricing for Duke Energy Corporation (DUK)

Current Trends

The one-month trend of DUK stock has the share price rising to the top third of the volatility range. Over the past month, the lowest DUK share price was roughly $98 in early July, whereas the highest share price was almost $107 in early August, just two days before the announcement.

The price closed in the upper 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 DUK shares implies that investors are extremely bullish ahead of earnings.

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 DUK has risen to an elevated range, chart watchers can recognize that traders' and investors' confidence is growing going into earnings. It is notable that, in the week before earnings, DUK's share price rose to its one-month high. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for a favorable earnings or not.

Option trading details can provide additional context to help chart watchers form an opinion about investor sentiment. Recently, option traders are favoring puts over calls by a slim margin. Normally, this volume suggests that traders are expecting a negative earnings report; however, it's necessary to understand the context of this volume.

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 DUK shares have risen to an elevated 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 32% chance that DUK 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 31% probability if prices go lower on the announcement.

It's necessary to note that the open interest featured roughly 40,000 call options compared to roughly 36,000 puts. At first glance, this would illustrate that option buyers had a bias toward calls over puts, which would reflect a bullish sentiment. However, because the call option implied volatility is falling, it can be inferred that traders are selling these options rather than buying them. This implies that option traders expect a decline in share price. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of call options being sold has only mildly pushed expectations lower.

Option pricing for Duke Energy Corporation (DUK)

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 downwards. This suggests that option buyers don't have a strong conviction about how the company will report, even though call volume outweighs put volume. Although investors and option traders do not expect it, a surprising report could push prices dramatically higher or lower.

Volatility pattern for Duke Energy Corporation (DUK)

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, DUK shares fell by less than 1% the day after earnings, before falling 2.3% the next day and continuing to fall for the next week. Investors may be expecting a similar 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

DUK shares typically make mild moves after earnings, so the announcement likely won't affect indexes directly. No matter what the report says, it will likely have an effect on stocks in the utilities sector. A positive report could lift other stocks in the sector such as NextEra Energy, Inc. (NEE), Dominion Energy, Inc. (D), or Sempra (SRE). It could also affect exchange traded funds (ETFs) such as State Street's Utilities Sector ETF (XLU) or the VanEck Vectors Uranium+Nuclear Energy ETF (NLR).