Investors of Sony Group Corporation (SONY) have kept the share prices range bound ahead of the company's fiscal first quarter earnings report. 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 SONY delivers a positive earnings surprise.
A sizable number of call options remains and is growing in the open interest for SONY, and option premiums are unusually high right now. 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 result in unforeseen downward pressure on the share price of SONY.
Correctly predicting the direction a stock will move following earnings is difficult. However, a comparison between the stock's price action and option trading activity shows that, if SONY delivers a negative report, the company's share price could fall significantly, moving closer to 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 by surprise and create a rapid decline in share price.
- Traders and investors have kept the share price range bound headed into the earnings announcement.
- The share price has been closing well above 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 outcome.
By comparing the details of both stock price and option behavior, chart watchers can gain valuable insight, although it is imperative to understand the context in which this price behavior took place. The chart below depicts the price action for SONY shares as of Monday, Aug. 2. This created the setup leading into the earnings announcement.
The one-month trend of SONY stock has the shares remaining near the top third of the volatility range. Over the past month, it's notable that the lowest SONY share price was near $97 in early July, whereas the highest share price was nearly $106 in late July. The price closed in the upper 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 risen above the 20-day moving average in the week before earnings. This price move from SONY shares implies that investors expect a positive earnings result.
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 SONY has remained in an elevated range, chart watchers can recognize that traders and investors are expressing positivity going into earnings. However, it is notable that, in the week before earnings SONY's share price rose above the 20-day moving average a few days before the report. 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 additional context to assist chart watchers in forming an opinion about investor expectations. Recently, option traders are favoring calls over puts by a decent margin, and the open interest on options has a noticeably larger number of calls than puts. Normally, this volume suggests that investors are expecting a positive earnings report.
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.
Option traders recognize that SONY shares are in an elevated 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. 6, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 41% chance that Sony shares will close inside this range by the end of the week if prices go higher. The red box represented the pricing for put options with a 35% probability if prices go lower on the announcement.
It's important to note that the open interest featured nearly 48,000 active call options compared to roughly 12,600 put options, demonstrating the bias that option buyers had, as the majority of the trades were call options. This amount normally implies that call option traders expect a rise in price. However, because the call box and put box are relatively equal in size, it tells us that the higher percentage of put options traded has only mildly skewed expectations higher. A far more complacent outlook is implied.
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 downwards. This suggests that option buyers don't have a strong conviction about how the company will report, even though call volume outweighs 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. After the previous earnings announcement, Sony shares rose by less than 1% the day after earnings before falling 4.5% the next day and continuing to fall for the next several weeks. Investors may be expecting a different kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
SONY shares typically make mild moves after earnings, so the results likely won't have a direct impact on indexes. No matter what the report says, it will likely have a significant effect on stocks in the consumer electronics industry. A positive report could lift other stocks in the industry such as Sonos, Inc. (SONO) or Vizio Holding Corp. (VZIO). It could also affect exchange traded funds (ETFs) such as Avantis' International Equity ETF (AVDE) or Changebridge Capital's Long/Short Equity ETF (CBLS).