Investors have kept the share prices of HSBC Holdings PLC (HSBC) range bound ahead of its fiscal second quarter earnings announcement. With a growing number of out-of-the-money call options in the open interest, it appears that option traders are positioned to anticipate a positive move. The unusual option trading may create a strong downward trend in the price action if HSBC delivers a negative earnings surprise.

A sizable number of call options remain in the open interest for HSBC, with unusually high option premiums. The trading volumes suggest that, in anticipation of a positive earnings report, traders have been buying calls and selling puts. If HSBC's earnings report is underwhelming, these bets could swiftly unwind, resulting in downward pressure on the share price of HSBC.

It is difficult to accurately predict the direction a stock will move after earnings. However, a comparison of the price action between stock prices and option trading activity shows that, if the company delivers a negative report, HSBC shares could fall significantly, moving further from its 20-day moving average in the first few days after the announcement. This could happen because options are priced for a positive move, but unexpected poor news could catch traders by surprise and create a rapid decline in price.

Key Takeaways

  • Traders and investors have kept the price of shares bound in a range headed into the announcement.
  • The price has recently closed closer to yet still below its 20-day moving average.
  • Put and call pricing is predicting a stronger upward move.
  • The volatility-based support and resistance levels allow for a move in either direction but a stronger move upward.
  • This setup creates an opportunity for traders to profit from an unexpected result.

By comparing the details of both stock and option price behavior, chart watchers can gain valuable insight, although this price behavior is better understood with context. The chart below shows the price action for the HSBC share price as of Thursday, July 29. This illustrates the setup leading into the earnings report.

Earnings pricing HSBC Holdings (HSBC)

Current Trends

The one-month trend of the stock has the shares moving in the lower bounds of the bottom range. Notably, over the past month, the highest HSBC share price was near $29 in the end of June, and the lowest share price was roughly $26 in mid-June. 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 remained in the lower range all month, before rising closer to the 20-day moving average as earnings approach. This price move from HSBC shares implies that investors are expecting a positive result from the announcement.

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 HSBC has been moving in the bottom of the range, chart watchers can recognize that traders and investors are expressing pessimism going into earnings. In the week before earnings, the share price rose, rising closer to the 20-day expected moving average the next week. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for an unfavorable earnings report or not.

Option trading details can provide additional information to help chart watchers form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a small margin, as recent option volume has a greater number of calls than puts. This normally suggests that investors are expecting good news from the company report. In this circumstance, traders are expecting that HSBC may move upwards after earnings.

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 HSBC 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. 6, the Friday after the earnings report is released. The green-framed box represents the pricing that the call option sellers are offering. It implies a 31% chance that HSBC 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 39% probability if prices go lower on the announcement.

It is important to note that the open interest featured over 72,000 call options active compared to roughly 86,000 put options, demonstrating the bias that option buyers had, as puts outweighed calls by a narrow margin. This unusual high number of puts normally implies that option traders are unsure of a decline in price. It should be noted, however, that the put/call ratio has been dropping over the past five days, as the number of call options are rising faster than the number of puts. However, because the call box and the put box are relatively equal in size, it tells us that the slightly higher number of put options traded has not skewed expectations higher or lower. This circumstance implies a far more complacent outlook.

Option pricing for HSBC Holdings (HSBC)

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 much more space to run on the upside. This suggests that option buyers do not have confidence in HSBC earnings, even though calls are being purchased almost equally to puts. Although investors and option traders do not expect it, a surprising announcement could push prices dramatically in either direction.

Volatility pattern for HSBC Holdings (HSBC)

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, HSBC shares rose by 4.7% the day of earnings and continued to rise the following week. Investors may be expecting the same kind of move in price after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected, but there is more room in the range for prices to move higher, above the 20-day moving average.

Market Impact

HSBC shares typically make mild moves after earnings, so it's not likely that the results will have a significant impact on index prices directly. However, no matter what the report says, it will likely affect stocks in the financial sector. A positive report could lift other stocks in the sector such as Barclays PLC (BCS), Credit Suisse Group AG (CS), or NatWest Group PLC (NWG).