Investors and traders have kept the share prices of Qualcomm Incorporated (QCOM) range bound ahead of its fiscal third quarter earnings announcement. At first glance, it appears that option traders are positioned to anticipate a positive move, as there has been a growing number of call options in the open interest. This unusual option trading may create a strong downward trend if QCOM delivers a negative earnings surprise.
A growing collection of call options remain in the open interest for Qualcomm, and option premiums are unusually high right now. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings announcement. Unwinding these bets could result in surprising downward pressure on the share price of QCOM.
Correctly predicting the direction a stock will move after earnings is challenging. However, a comparison of the price action between stock prices and option trading activity shows that, if the company delivers an unfavorable earnings report, QCOM share prices could decline significantly. This is possible because options are priced for a negligible move, but unexpected poor news could catch traders off guard and create a swift fall in the share price.
- Traders and investors have kept the price of shares in a relatively tight range headed into the announcement.
- The price has been crossing its 20-day moving average but recently climbed above it.
- Put and call pricing is predicting a stronger upwards 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 investors who want to protect their positions or speculators who want to profit from accurately predicting unexpected moves in an underlying stock or index. 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 QCOM share price as of Monday, July 26. This created the setup leading into the earnings report.
The one-month trend of the stock has the shares remaining in a fairly tight range. It is notable that, over the past month, the highest QCOM share price was near $145, in mid-July, and the lowest share price was roughly $135, in early July. 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 around but mostly held in an average range all month. This price move from QCOM shares implies that investors expect little change from the upcoming report. It is notable that, in the week before the earnings report is due to be announced, share prices are closing above QCOM’s 20-day moving average.
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 QCOM has been holding in a middle range, chart watchers can recognize that traders and investors are expressing complacency going into earnings. In the week before earnings, the share price gradually rose, closing above the 20-day moving average. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for a favorable earnings report or not.
Option trading details can provide additional information to help chart watchers form an opinion about investor expectations. Recently, option trading volumes are favoring calls over puts by a nearly 3-1 margin. This suggests that traders are buying calls and selling puts, as the implied volatility is rising for call options. However, in this circumstance, traders appear to be expecting that QCOM will move higher after earnings.
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 QCOM shares are average 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 the call option sellers are offering. It implies a 37% chance that Qualcomm 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 34% probability if prices go lower on the announcement.
It is important to note that the open interest featured over 341,000 call options active compared to roughly 388,000 put options, demonstrating the bias that option buyers had, as over half of the options are put options. This unusual amount normally implies that put option traders expect a decline in price. However, because the call box and the put box are relatively equal in size, it tells us that the higher percentage of put options traded has not skewed expectations lower. It Is notable that recent trading volumes have had more calls than puts and that implied volatility for puts is declining. This can mean that more put options are being sold. This circumstance implies a far more complacent outlook.
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 option buyers don’t have a strong conviction about how the company will report, even though, by recent trading volumes, calls are being purchased over puts. Although investors and option traders do not expect it, a surprising report would 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, QCOM shares rose by 4.5% in the day following before dropping the following week. Investors may 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.
QCOM shares typically make significant moves after earnings, so the results may move indexes directly. Regardless of what the report says, it will likely have a noticeable impact on stocks in the technology sector. A positive report could lift other stocks in the sector such as Nvidia Corporation (NVDA), Taiwan Semiconductor Manufacturing Company Limited (TSM), or Intel Corporation (INTC). It could also affect exchange-traded funds (ETFs) such as State Street’s Technology Sector Index ETF (XLK) and potentially Invesco’s QQQ Trust ETF (QQQ).