Investors of eBay Inc. (EBAY) have bid down the share price to a below average range ahead of the company's fiscal second quarter earnings announcement. At first glance, it appears that option traders are positioned for a negative move, as the number of put options in the open interest outweighs the number of calls. The unusual option activity could create a strong upward trend in the price action if EBAY delivers a positive earnings surprise.
A sizable number of put options remain in the open interest for EBAY, and option premiums are currently at an unusually elevated level. Trading volumes indicate that traders have been buying puts and selling calls in anticipation of an unfavorable earnings report. Unwinding these bets could result in unforeseen upward pressure on the share price of eBay.
Accurately predicting the direction a stock will move after earnings is difficult. However, a comparison between the stock's price action and option activity shows that, if EBAY delivers a positive report, the company's share price could rise significantly, moving closer to its 20-day moving average after the announcement. This could happen because options are priced for a downwards move, but unforeseen good news could catch traders by surprise and create a swift rise in share price.
- Traders and investors have bid down the share price headed into the earnings report.
- The share price has recently closed well 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 upwards.
- 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 EBAY share price as of Aug. 9. This created the setup leading into the earnings report.
Over the past month, the trend for EBAY stock has the share price reaching its all-time high at the top of the volatility range in late July, before falling well below its 20-day moving average to the bottom third of the volatility range mere days later. In this time period, the lowest EBAY share price was roughly $65 in early August, whereas the highest share price was over $74, an all-time high, in late July. The price closed in the lower 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 EBAY 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 EBAY has recently fallen below its 20-day moving average, chart watchers can recognize that traders and investors are expressing growing concern going into earnings. It's notable that, in the week before earnings, EBAY's share price fell from its all-time high, closing well below the 20-day moving average. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for unfavorable earnings or not.
Option trading details can provide chart watchers with additional context to assist them in forming an opinion about investor expectations. Recently, option traders are favoring puts over calls by a slim margin. On Monday, there were over 31,000 puts traded opposed to over 15,000 calls. Normally, this volume indicates that traders are feeling bearish 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 EBAY shares are below 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. 13, the Friday after earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 35% probability that eBay 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 35% chance if prices go lower on the announcement.
It's necessary to note that the open interest featured over 120,000 calls compared to nearly 164,000 puts, demonstrating the bias that option buyers had, as traders favored puts over calls. It is notable that over 31,000 puts and over 15,000 calls were traded on Monday, skewing the open interest numbers even further in favor of put 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 lower. 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 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 put volumes outweigh call 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 of this, 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, EBAY shares fell by 10% the day after earnings before gradually rising 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.
eBay shares typically make substantial moves after earnings, so it's possible that the results could have a direct impact on indexes. No matter what the report says, it could have an effect on stocks in the internet retail industry. A positive report could lift other stocks in the sector such as Etsy, Inc. (ETSY), Wayfair Inc. (W), or MercadoLibre, Inc. (MELI). It could also affect exchange traded funds (ETFs) such as the First Trust NASDAQ Retail ETF (FTXD), Invesco's QQQ Trust ETF (QQQ), or State Street's S&P 500 ETF Trust (SPY).