Robinhood Markets (HOOD) Option Traders Optimistic for First Earnings

Investors of Robinhood Markets, Inc. (HOOD) have kept the share prices range bound ahead of the company's fiscal second quarter earnings announcement. At first glance, it appears that option traders are positioned 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 HOOD delivers a positive earnings surprise.

A growing number of call options remain the open interest for HOOD, and option premiums are at an unusually elevated level right now. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a favorable earnings report. Unwinding these bets could create unforeseen downward pressure on the share price of HOOD.

It is difficult to accurately predict the direction a stock will move after earnings. However, a comparison between the stock's price action and option activity shows that, if HOOD delivers a negative report, the company's share price could fall, moving further below its 20-day moving average after the announcement. This is possible because options are priced for a move upwards, but unexpected poor news could catch traders off guard and create a rapid decline in share price.

A comparison between the details of both option behavior and stock price can grant chart watchers valuable insight; however, it is imperative to understand the context in which this price action took place. The chart below depicts the price action for the HOOD share price as of Tuesday, Aug. 17. This created the setup leading into the earnings report.

Current Trends

Since its IPO on July 29, the trend for HOOD stock has the share price exploding out of the top of the volatility range before settling in the middle of the range, closing just below its 20-day moving average (based on two-hour candles). It's notable that the lowest HOOD share price was around $32 on the day of the IPO, whereas the highest share price was nearly $85 in early August. The share 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 closed below the 20-day moving average in the week before earnings. This price move from HOOD shares implies that investors’ confidence is fading as the earnings report approaches.

In this context where the price trend for HOOD has recently closed below its 20-day moving average, chart watchers can recognize that traders and investors are expressing ambivalence going into earnings. It's notable that, in the week before earnings, HOOD's share has found support below the moving average. 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 chart watchers with additional context to help them form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a noticeable margin. On Monday, there were over 83,000 calls traded as opposed to over 51,000 puts. Normally, this volume indicates that traders are feeling bullish toward the upcoming announcement.

Trading Activity

Option traders recognize that HOOD 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 35% probability that HOOD 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% chance if prices go lower on the announcement.

It's necessary to note that the open interest featured nearly 235,000 calls compared to over 191,000 puts, demonstrating the bias that option buyers had, as traders favored calls over puts. It's notable that recent call volume has continued to outweigh put volume, which could skew open interest numbers further in favor of call options. Even though there are a high number of puts in the open interest, implied volatility for these options has been dropping, which means that these options are being sold, rather than bought.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at 4 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 could push prices dramatically higher or lower.

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. This is the first time HOOD is reporting financials results since its IPO in late July, so there are no historical results to compare against. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

HOOD is still a relatively new player on the market, so its earnings results likely won't move indexes directly. No matter what the report says, it could have an impact on stocks in the software industry. A positive report could lift other stocks in the industry such as Cloudflare, Inc. (NET), Palantir Technologies Inc. (PLTR), or Palo Alto Networks, Inc. (PANW). It could also affect exchange traded funds (ETFs) such as the ARK Innovation ETF (ARKK) or the Fidelity NASDAQ Composite Index ETF (ONEQ).