Investors of The Honest Company, Inc. (HNST) 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 positioned for a positive move, as the open interest numbers are heavily skewed toward call options. The unusual option activity could create a strong upward trend in the price action if HNST delivers a positive earnings surprise.

A sizable number of call options remain in the open interest for HNST, and option premiums are unusually high right now. 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 unexpected downward pressure on the share price of HNST. 

It is challenging to accurately predict the direction a stock will move after earnings. However, comparison between the stock's option activity and price action shows that, if HNST 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 a positive move, but unforeseen poor news could catch traders off guard and create a rapid decline in share price.

Key Takeaways

  • Traders and investors have kept the HNST 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 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 HNST share price as of Wednesday, Aug. 12. This created the setup leading into the earnings report.

Earnings pricing for The Honest Company, Inc. (HNST)

Current Trends

Over the past month, the trend for HNST stock has the share price remaining below the 20-day moving average. In this time period, it's notable that the lowest HNST share price was roughly $13 in early August, whereas the highest share price was $15 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 HSNT shares implies that investors are ambivalent 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 HNST has remained in an average range, chart watchers can recognize that traders and investors are expressing complacency going into earnings. It's notable that, in the week before earnings, HNST share price fell well below 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 help chart watchers form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a wide margin, over 3-to-1. Normally, this volume indicates that traders bullish 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 HNST shares are 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. 20, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 29% probability that HNST 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 is necessary to note that the open interest featured over 12,000 call options compared to over 3,000 puts, demonstrating the bias that option buyers had, as traders favored calls over puts by a nearly 4-to-1 ratio. However, because the call box and put box on the chart are relatively equal in size, it tells us that the large percentage of call options traded has only mildly skewed expectations higher. A far more complacent outlook is implied.

Option pricing for The Honest Company, Inc. (HNST)

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 in either direction. 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 could push prices dramatically higher or lower.

Volatility pattern for The Honest Company, Inc. (HNST)

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, HNST shares fell 7.37% the day after earnings and continued to fall for the rest of the 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.

Market Impact

HNST could hardly be considered a bellwether stock, so it's unlikely that the earnings announcement will affect indexes directly. However, no matter what the report says, it could have an effect on stocks in the specialty retail industry. A positive report could lift other stocks in the sector such as Hibbett, Inc. (HIBB), The RealReal, Inc. (REAL), or Betterware de Mexico, S.A.B. de C.V. (BWMX). It could also affect exchange traded funds (ETFs) such as the Blackrock Future Innovators ETF (BFTR) or the iShares Factors US Small Blend Style ETF (STSB).