Investors of Royal Gold, Inc. (RGLD) have bid down the share price to a below average range ahead of the company's fiscal fourth quarter earnings announcement. At first glance, it appears that option traders are positioned for a positive move, as the number of call options in the open interest is greater than the number of puts. The unusual option activity could create a strong downward trend in the price action if Royal Gold delivers a negative earnings surprise.

Call option numbers are growing in the open interest for RGLD, and option premiums are currently at an usually elevated level. 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 create unexpected downward pressure on the share price of Royal Gold.

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

Key Takeaways

  • Traders and investors have bid down the Royal Gold share price headed into the earnings announcement.
  • The share price has recently closed well 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 result.

Comparing the details between stock price and option behavior can grant chart watchers valuable insight; however, it is imperative to understand the context in which this price behavior took place. The chart below illustrates the price action for the RGLD share price as of Aug. 10. This created the setup leading into the earnings announcement.

Earnings pricing for Royal Gold, Inc. (RGLD)

Current Trends

Over the past month, the trend for RGLD stock rose above the 20-day moving average into the upper third of the volatility range in late July, before falling to the lower third of the range, closing well below the 20-day moving average in early August. In this time period, the lowest RGLD share price was around $112 in early August, and the highest share price was over $122 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 RGLD shares implies that investors' confidence is waning as the earnings report approaches.

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 RGLD has recently fallen below its 20-day moving average, chart watchers can recognize that traders and investors are expressing growing pessimism headed into earnings. It's notable that, in the week before earnings, RGLD's share price fell from its monthly 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 calls over puts over 2-to-1. Normally, this type of volume indicates that traders are feeling 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 RGLD shares are in a below 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. 13, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 33% probability that RGLD 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 36% chance if prices go lower on the announcement.

It's necessary to note that the open interest featured over 9,500 calls compared to nearly 7,000 puts, demonstrating the bias that option buyers had, as traders favored calls over puts. Recent volumes have seen traders favoring calls over puts by a rate of 2-to-1, skewing the open interest numbers even further in favor of call 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 higher. A much more complacent outlook is implied.

Option pricing for Royal Gold, Inc. (RGLD)

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 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.

Volatility pattern for Royal Gold, Inc. (RGLD)

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, RGLD shares rose by 3.67% 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.

Market Impact

RGLD is far from a bellwether stock, so the earnings results most likely won't have a direct impact on indexes. No matter what the report says, it could have an effect on stocks in the gold industry. A positive report could lift other stocks in the industry such as Gold Fields Limited (GFI), Kinross Gold Corporation (KGC), or Yamana Gold Inc. (AUY). It could also affect exchange traded funds (ETFs) such as the GO Gold and Precious Metal Miners ETF (GOAU) or the VanEck Vectors Gold Miners ETF (GDX).