While investors have kept the share prices of Snap Inc. (SNAP) range bound ahead of its second quarter earnings announcement, they also have provided a short-term downtrend. On the surface, it appears that options traders are positioned to anticipate a negative move, as there have been a growing number of put options in the open interest. The unusual option trading may create a strong upward trend in the price action if SNAP delivers a positive earnings surprise.

A sizable collection of put options remains in the open interest for SNAP, with unusually high option premiums. The trading volumes suggest that, in anticipation of a lackluster earnings report, traders have been both buying puts and selling calls. If Snap's earnings report does not meet the market's expectations, these bets could swiftly unwind, resulting in upward pressure on the share price.

Accurately predicting the direction a stock will move after earnings is difficult. However, a comparison of the price action between stock prices and option trading activity shows that, if the company delivers a positive report, SNAP shares could rise significantly, moving closer to 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.

Key Takeaways

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

Option trading represents the activities of speculators who want to profit from correctly forecasting unexpected moves in an underlying stock or index, or investors who want to protect their positions. 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, although it helps to understand the context in which this price behavior took place. The chart below depicts the price action for the SNAP shares as of Tuesday. This created the setup leading into the earnings report.

Earnings setup for SNAP

Current Trends

The one-month trend of the stock has the shares remaining in a  range. It is notable that, over the past month, the highest SNAP share price was near $69 in early July, and the lowest share price was roughly $57. The price closed just outside 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 SNAP shares implies that investors expect a downward change after the upcoming 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 SNAP had been holding in a middle range and recently started trending lower, chart watchers can recognize that traders and investors are not excited going into earnings. In the week before earnings, the share price gradually fell below the 20-day moving average. 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 puts over calls by a slim margin, as the open interest on options has a greater number of puts than calls. This normally suggests that investors are expecting poor news from the company report. However, in this circumstance, traders appear to be expecting that SNAP shares won't move strongly, up or down, 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 for SNAP 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 23, 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 45% chance that Snap 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 32% probability if prices go lower on the announcement.

The open interest featured over 766,000 call options active compared to roughly 967,000 put options, demonstrating the bias that option buyers had, as the majority of options were put options by a narrow margin. This unusually equal amount normally implies that option traders expect a move but aren't sure in which direction. However, because the call box and the put box are relatively equal in size, it tells us that the high percentage of put options traded has not skewed expectations lower. This circumstance implies a far more complacent outlook.

Option pricing for SNAP

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 on either side to run. This suggests that option buyers don't have a strong conviction about how the company will report, even though puts are being purchased over calls. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

Volatility pattern for SNAP

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, SNAP shares fell by 7.45% in the day following and marginally rose the following week, before gradually rising above the pre-earnings price in May. Investors seem to 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.

Market Impact

SNAP shares typically make exaggerated moves after earnings, but even so, the result would move major index prices very little. However, no matter how the report comes out, it will likely have a more significant impact on stocks in the Communication Services sector. A positive report could lift other stocks in the sector such as Facebook, Inc. (FB) or Google parent Alphabet Inc. (GOOG). It would also affect exchange-traded funds (ETFs) such as State Street's Communication Services Sector Index ETF (XLC) and potentially Vanguard's Total Stock Market ETF (VTI).