Investors have kept the share prices range bound for JPMorgan Chase (JPM) ahead of its fiscal second-quarter earnings announcement. On the surface, it appears that options traders are positioned to anticipate a negligible move, and are perhaps even anticipating bad news. But the unusual option trading may create an unexpectedly strong upward trend in the price action if JPM delivers a positive earnings surprise.
A sizable collection of put options remains in the open interest for JPM and option premiums are unusually high right now. The trading volumes indicate that traders have been buying puts and selling calls to protect against bad news and aren’t expecting a positive earnings surprise. Unwinding their bets could result in upward pressure on the price of JPM.
There's no way to accurately predict the direction a stock will move after an earnings announcement. However, a comparison of the price action between stock prices and option trading activity shows that, if the company delivers a positive report, JPMorgan shares could jump significantly, diverging away from its 20-day moving average in the first few days after the announcement. This could happen because options are priced for a small move, but unexpected good news could catch traders by surprise and create a rapid rise in price.
- Traders and investors have kept the price of shares in a relatively tight range headed into the announcement.
- The price has been closing just above its 20 day moving average.
- Put and call pricing is predicting roughly equal moves despite the higher volume of calls traded.
- The volatility-based support and resistance levels allow for a stronger move upward than downward.
- This setup creates an opportunity for traders to profit from an unexpected result.
Option trading represents the activities of investors who want to protect their positions or speculators who want to profit from correctly forecasting unexpected moves in an underlying stock or index. That means option trading is literally a bet on market probabilities. By comparing the details of both stock and option price behavior, chart watchers can gain valuable insight, though it helps to understand the context in which this price behavior took place. The chart below depicts the price action for JPM’s share price at close of business Friday. This created the setup leading into the earnings report.
The one-month trend of the stock has the shares remaining in a wide range. It is notable that over the last month JPM rose to $165 per share at the beginning of June and has since drifted lower as the announcement day draws near. 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 moved around but mostly held in an average range all month. This price move from JPM shares implies that investors expect little change from the upcoming report.
The ATR has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10-20 time periods, which includes two to four weeks of trading on a daily chart.
In this context where the price trend for JPM has been holding in a middle range, chart watchers can recognize that traders and investors are expressing complacency going into earnings. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for a favorable earnings report or not.
Option trading details can provide additional information to help chart watchers form an opinion about investor expectations. While recently option traders are favoring calls over puts by a slim margin, the open interest on options has a greater number of puts than calls. This normally suggests that investors are not expecting good news from the company report. However, in this circumstance traders appear to be expecting that JPM won’t move strongly, up or down, after earnings.
The Keltner Channel indicator displays a set of semi-parallel lines calculated from the base of a 20-day simple moving average. 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 JPM shares are 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 July. 16, 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 73% chance that JPMorgan 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 44% probability if prices go lower on the announcement.
It is important to note that trading on Friday featured over 114,000 call options traded compared to roughly 48,000 put options demonstrating the bias that option buyers had. That only 30 percent of the trades were put options. This unusually low amount normally implies that call option traders expect a jump in price. However, because the call box and the put box are equal in size it tells us that the high percentage of call options traded has not skewed expectations higher. This circumstance implies a far more complacent outlook.
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 on either side to run. This suggests option buyers don’t have a strong conviction about how the company will report. 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, JPM shares rose by under 1% in the day following and started to drop the following week. Investors may be expecting the same kind of small move in price after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected.
The effect of JPMorgan’s earnings report is influential to the market because of the company’s key connection to the financial sector. JPM shares typically make mild moves after earnings, so the result doesn’t move index prices directly. However, no matter what the report says, it will likely have a significant impact on stocks in the financial services sector. As one of the first major companies to release their earnings report for the quarter, JPM plays a part in setting the tone for the market as a whole. A key factor to pay attention to will be how the recently announced dividend increase will affect JPM’s bottom line. A positive report could lift other stocks in the sector such as Citigroup (C), Bank of America (BAC), or Wells Fargo (WFC). It would also impact exchange traded funds ETFs such as State Street’s Sector Index ETF (XLF), and potentially State Street’s S&P 500 Index ETF (SPY).
Option traders on JPM are favoring call options by a strong margin over put options before the company’s earnings announcement. Investors are clearly expecting only a mild move. If a surprisingly good report does materialize, JPM shares could lift into a new upward trend. The volatility price range size is enough to exceed both call and put pricing, allowing for a large move in either direction.