T-Mobile US, Inc. (TMUS) investors have kept the share prices range bound ahead of the company's fiscal second quarter earnings report. On the surface, it appears that option traders are predicting a negative move, as there are a greater number of put options in the open interest than calls. The unusual option trading could create a strong upward price action if TMUS delivers a favorable earnings surprise.

A sizable amount of put options remain the open interest for T-Mobile, and option premiums are unusually high right now. Trading volumes indicate that traders have been selling calls and buying puts in anticipation of a negative earnings report. If these bets were to unwind, it could result in unforeseen upward pressure on TMUS's share price.

It is difficult to correctly predict the direction a stock will move following earnings. However, a comparison between the stock's price action and option trading activity shows that, if TMUS delivers a positive report, the company's share price could rise significantly, moving closer to its 20-day moving average in the days after the announcement. This could happen because options are priced for a downwards move, but unexpected good news could catch traders by surprise and create a swift rise in share price.

Key Takeaways

  • Traders and investors have kept the share prices range bound headed into the earnings announcement.
  • The share price has been closing below its 20-day moving average, despite having recently found its all-time high.
  • Call and put pricing is predicting a stronger move downwards.
  • The volatility-based support and resistance levels allow for a stronger move to the upside.
  • This setup creates an opportunity for traders to profit from unexpected earnings results.

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 the TMUS share price as of Wednesday, July 28. This created the setup leading into the earnings announcement.

Earnings pricing for T-Mobile US, Inc. (TMUS)

Current Trends

Over the past month, the trend of TMUS stock has the shares rising to their all-time high before falling below the 20-day moving average. Over the past month, it's notable that the lowest TMUS share price was near $144 in mid-July, whereas the highest share price was nearly $150, an all-time high, just a few days prior. 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 to a lower range in the week before earnings. This price move from TMUS shares implies that investors expect a negative earnings result.

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 TMUS has fallen to an average range, chart watchers can recognize that traders and investors are expressing pessimism going into earnings. In the week before earnings, TMUS's share price reached its all-time high, before slightly pulling back the next week. 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 additional context to assist chart watchers in forming an opinion about investor expectations. Recently, option traders are favoring puts over calls by nearly 1.5-to-1, and the open interest on options has a greater number of puts than calls. Normally, this suggests that investors are expecting a negative earnings report and that traders appear to be expecting TMUS to move lower 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 T-Mobile shares are in an 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 July 30, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 36% that T-Mobile 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 37% probability if prices go lower on the announcement.

It's important to note that the open interest featured over 93,000 active put options compared to roughly 87,000 call options, demonstrating the bias that option buyers had, as over half of the trades were put options. This amount normally implies that put option traders expect a decline 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 lower. A far more complacent outlook is implied.

Option pricing for T-Mobile US, Inc. (TMUS)

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 to run in either direction. 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 T-Mobile US, Inc. (TMUS)

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, TMUS shares rose by 4.4% in the day following and continued to rise the following week, before falling closer to the 20-day moving average. Investors may not be expecting the same 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.

Market Impact

T-Mobile shares typically make mild moves after earnings, so the result will likely not move index prices directly. However, no matter what the outcome of the report, it will likely have an impact on stocks in the communications sector. A positive report could lift other stocks in the sector such as Verizon Communications Inc. (VZ) or AT&T Inc. (T). It may also affect exchange-traded funds (ETFs) such as State Street's Communications Services Sector Index ETF (XLC) and potentially Invesco's QQQ Trust ETF (QQQ).