Investors of Uber Technologies, Inc. (UBER) have expressed pessimism ahead of the company's fiscal second quarter earnings announcement by selling down the share price. At first glance, it appears that option traders are predicting a positive move, as there are a growing number of call options in the open interest. This unusual option volume has the potential to create strong downward pressure on the share price if UBER delivers a negative earnings surprise.

A growing number of call options remain in the open interest for Uber, and option premiums are unusually elevated right now. Trading volumes show that option traders have been buying calls and selling puts in expectation of a positive earnings announcement. Unwinding these bets could create unexpected downward pressure on UBER's share price.

Correctly forecasting the direction a stock will move following earnings is challenging. However, a contrast of the stock's price action and option trading activity shows that, if UBER delivers a negative report, the company's share price could fall significantly, moving further from its 20-day moving average in the days after the announcement. This could happen because options are priced for a move upwards, but a surprisingly poor report could catch traders off guard and create a swift decline in share price.

Key Takeaways

  • Traders and investors have sold down the UBER share price to a below average range before the earnings report.
  • The share price has been closing well below its 20-day moving average.
  • Call and put pricing is predicting a stronger move upwards.
  • The volatility-based support and resistance levels allow for a larger move to the upside.
  • This setup creates an opportunity for traders to profit from an unexpected earnings report.

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 UBER share price as of Monday, Aug. 2. This created the setup leading into the earnings announcement.

Earning pricing for Uber Technologies, Inc. (UBER)

Current Trends

The one-month trend of UBER stock has the share price falling well below the 20-day moving average, toward the extremes of the volatility range. Over this time period, it's notable that the lowest Uber share price was around $45 in mid-July. The highest share price over the past month was approximately $50, in early July. The price closed in the lower region shown 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 the lowest range in the week before earnings. This price move from UBER 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 share price trend for UBER has fallen toward an extreme range, chart watchers can recognize that investors and traders are showing pessimism headed into the earnings announcement. In the week before earnings, UBER's share price fell further below the 20-day moving average. That makes it important for chart watchers to surmise whether the move is indicative of investors' expectations for an unfavorable earnings report or not.

Option trading details can provide extra context to help chart watchers form an opinion about investor expectations. Recently, option traders are favoring calls over puts by an increasing margin. Normally, this suggests that investors are expecting a positive earnings report and that traders appear to be expecting that UBER will trend higher 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 Uber 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. 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 38% chance that Uber 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 34% probability if prices go lower on the announcement.

It's important to note that the open interest featured over 1.2 million active call options compared to nearly 892,000 put options, demonstrating the bias that option buyers had, as well over half of the trades were call options. This amount normally implies that call option traders expect an increase in price. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of call options traded has only mildly skewed expectations higher.

Option pricing for Uber Technologies, Inc. (UBER)

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 upwards compared to downwards. This suggests that option buyers have a strong conviction about how the company will report, as calls are being purchased over puts. Although investors and option traders do not expect it, a surprising report could push prices dramatically higher or lower.

Volatility pattern for Uber Technologies, inc. (UBER)

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, Uber shares fell by 8.9% in the day following and continued to fall the following week, before moving above the 20-day moving average a few weeks later. 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.

Market Impact

UBER shares have made drastic moves after earnings in the past, so it's possible that the results could move index prices directly. No matter what the report says, it will likely have an effect on stocks in the technology sector. A positive report could lift other stocks in the sector such as Shopify Inc. (SHOP), Snowflake Inc. (SNOW), or Lyft, Inc. (LYFT). It could also affect exchange traded funds (ETFs) such as Vanguard's Total Stock Market ETF (VTI) or the iShares Russell 1000 Growth ETF (IWF).