Investors of Exxon Mobil Corporation (XOM) possess expressed doubt ahead of the company’s fiscal second quarter earnings announcement by bidding down the share cost out. At first glance, it appears that option traders are predicting a positive move, as there are a large number of command options in the open interest. The unusual option trading may create a strong upward trend in the price action if XOM carts a favorable earnings surprise.
A sizable amount of call options remain in the open interest for Exxon Mobil, and chance premiums are unusually high right now. Trading volumes and implied volatility indicate that traders have been procuring calls and selling puts in preparation of a positive earnings report. Unwinding these bets could result in unexpected spiralling pressure on XOM’s share price.
Correctly predicting the direction a stock will move after earnings is difficult. How on earth, a comparison between the stock’s price action and option trading activity shows that, if XOM delivers a negative earnings check out, the company’s share price could fall significantly, moving closer to its 20-day moving average in the days after the statement. This could happen because options are priced for an upwards move, but unexpected poor news could gather traders off guard and create a swift decline in share price.
- Traders and investors have bid down Exxon Mobil deal prices to a below average range headed into the earnings report.
- The share price has recently been sign below its 20-day moving average.
- Call and put pricing is expecting a stronger move to the upside.
- The volatility-based support and guerillas levels allow for a stronger move to the upside.
- This setup creates an opportunity for traders to profit from unexpected earnings culminates.
Option trading represents the activities of investors who desire to protect their positions or speculators attempting to profit from accurately forewarning the unexpected moves in an underlying stock or index. That makes option trading a literal bet on market probabilities. By corresponding the details of stock prices and option behavior, chart watchers can gain valuable insight, although it is helpful to conscious of the context in which this price behavior took place. The chart below illustrates the price action for the XOM equity price as of the morning of Wednesday, July 28. This created the setup leading into the earnings report.
The one-month trend of XOM stock has the shares falling below its 20-day moving average, declining into the last analysis third of the volatility range. Over the past month, it’s notable that the lowest XOM share price was roughly $55 in mid-July, whereas the highest share cost was roughly $64 in late June. The price closed in the upper region depicted by the technical studies on this plot.
The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Usual True Range (ATR) for the stock. This array helps to highlight the way the price has moved to a lower range in the week formerly earnings. This price move from XOM shares implies that investors expect a negative earnings come about.
The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical regular length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of customer on a daily chart.
In this context where the price trend for XOM has been falling to a below average range, design watchers can recognize that traders and investors are not expressing much optimism going into earnings. In the week once earnings, XOM’s share price fell to its one-month low before rising closer to the 20-day moving average. That makes it foremost for chart watchers to determine whether the move is reflecting investors’ expectations for a favorable earnings or not.
Option trading details can take care of additional context to assist chart watchers in forming an opinion about investor expectations. Recently, option vendors are favoring calls over puts by a wide margin, with calls being bought over puts nearing 6-to-1 by the time of writing Wednesday morning. Normally, this suggests that investors are expecting a positive earnings relate and that traders appear to be expecting XOM to move higher after earnings.
The Keltner Channel indicator displays a set of semi-parallel employments based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by totaling 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 guide indicator makes for an excellent visualization tool when charting historical volatility.
Option wholesalers recognize that XOM shares are in a subdued range and have priced their options as a bet that the stock will precise 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 exemplifies the pricing that call option sellers are offering. It implies a 39% chance that Exxon Mobil dispensations 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 39% distinct possibility if prices go lower on the announcement.
It’s important to note that the open interest featured over 870,000 active notice options compared to roughly 573,000 put options, demonstrating the bias that option buyers had. That over 60% of the markets were call options. This amount normally implies that call option traders expect a by in price. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of call way outs traded has only mildly skewed expectations high. A far more complacent outlook is implied.
The purple lines on the plan are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated dominions of strong support and resistance in the price action. These regions show up when the channel lines make a clear-cut turn within the previous three months.
The levels that the turns mark are annotated in the chart below. What is illustrious in this chart is that the call and put pricing are in such a close range with plenty of space to run upwards approximated to downwards. This suggests option buyers don’t have a strong conviction about how the company will report, plane though calls are being purchased over puts. Although investors and option traders do not expect it, a surprising look into would push prices dramatically higher or lower.
These support and resistance levels show a large spread 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 blow and could generate an unusually large move. After the previous earnings announcement, XOM shares rose by 2.76% in the day take an interest in and continued to rise the following week. Investors may be expecting the same kind of move in the price after this advert. With plenty of room in the volatility range, share prices could rise or fall more than envisioned.
XOM shares typically make small moves after earnings, so the result is unlikely to move token prices directly. However, no matter what the report says, it will likely have a direct impact on merchandises in the energy sector. A positive report could lift other stocks in the sector such as Chevron Corporation (CVX) or BP PLC (BP). It determination also affect exchange-traded funds (ETFs) such as State Street’s Energy Sector Index ETF (XLE) and potentially Affirm Street’s S&P 500 Index ETF (SPY).