After Verizon Communications Inc. (VZ) reported that it had beaten both profit and revenue estimates for its second quarter earnings results, options buyers are taking actions that imply they think the share will drift higher in the future. This may come as a surprise considering that the VZ share price climbed only less than 1% the day the report was announced. VZ posted earnings per share (EPS) of $1.37 and revenue of $33.8 billion, compared to analysts expectations of $1.30 and $32.68 billion, respectively. A better-than-expected increase in postpaid phone subscribers gave the company the confidence to raise full-year guidance for both EPS and revenue. Prior to earnings, investors had kept the share prices range bound, with a sizable amount of out-of-the-money call options in the open interest.
Option trading volumes indicated that traders had been buying calls and selling puts, and options activity after earnings suggests that this trend has continued, giving traders an optimistic outlook toward the VZ share price. That’s because the price action seems to be holding support, while the option activity suggests that traders are buying calls and selling puts in anticipation of upward momentum.
A comparison of the price action between stock prices and option trading activity on the days following earnings shows some evidence to suggest that option traders might be cautiously optimistic. VZ’s share price remained range bound after earnings, as the trading activity has kept prices just under its 20-day moving average after the announcement. Additionally, put option activity remained relatively stable, and call option activity increased. This could happen because options traders believe that Verizon is undervalued at current levels and that the share price will drift higher in the near term.
- Traders and investors bought shares in VZ following the earnings announcement, as the stock rose less than 1% the day of the report.
- The share price of VZ has remained slightly below its 20-day moving average after the earnings report.
- Put and call option activity appears to be positioned for a drift higher despite the negligible shift in the share price.
- The volatility-based support and resistance levels allow for a stronger mover upward than downward.
- This setup creates an opportunity for traders to profit post-earnings share price movement.
Option trading can imply a forecast for the weeks ahead; it represents the actions of investors who wish to hedge their long positions or speculators looking to profit from correctly predicting unforeseen movement in an underlying stock or index. Options trading is literally a bet on the probabilities of the market – a bet made by traders that are, on average, better informed than most investors. Understanding the context in which the share price behavior took place is the key to maximizing this insight. The chart below depicts the price action for VZ shares on Friday, July 23, illustrating the post-earnings report setup.
The share prices of the stock have remained in a narrow range over the course of the one-month trend. Over the past month, VZ rose to nearly $57 per share near the middle of July and drifted slightly lower as earnings approached, before finally rising less than 1% on the day of the announcement and remaining relatively flat the day after that.
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 VZ shares implies that investors are ambivalent in VZ moving forward.
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.
Chart watchers can recognize that traders were not expecting a significant move upwards or downwards going into earnings, based on the price trend for VZ holding in a middle range. It is notable that there was a relative uptrend in the week before earnings. Chart watchers can also form an opinion of investor expectations by paying attention to option trading details. Prior to the announcement, traders appeared to be expecting that VZ would 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.
The recent activity of option traders implies that they consider VZ shares undervalued and have purchased call options as a bet that the stock will close within the box depicted in the chart between today and Aug. 20, the next monthly expiration date for options. The green-framed box represents the pricing that the call option sellers are offering. It implies a 67% chance that VZ shares will close inside this range or lower by Aug. 20. So sellers are only mildly bullish. However, buyers are snapping up this pricing, suggesting that buyers consider these options underpriced. Since the pricing implies only a 33% chance that prices could close above this green box, it appears that buyers are willing to take those long odds.
It is important to note that open interest on Friday featured over 507,000 call options compared to roughly 304,000 put options, demonstrating the bias that option buyers had, as there were more calls than puts. This high amount normally implies that call option traders expect the share price to continue to rise. After earnings, the volatility has decreased dramatically, but the number of call options in the open interest remains greater than the number of puts – even increasing. This signals that put options are being sold, rather than bought, creating a bullish sentiment. For the strikes at the money and one step either direction, the call volume far outweighs the put volume. Out-of-the-money put option volume declines at a much faster rate than out-of-the-money call volume, signifying that more traders believe that VZ share prices will drift higher than those who believe share prices will head lower.
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 higher. This suggests that option buyers have a mildly bullish conviction about how the company will move in the weeks following the report. Although investors and option traders did expect movement from the report, the share price moved less than it did after the last earnings report.
These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that there could be a large move in either direction in the near future. After the previous earnings announcement, VZ shares dropped by 2.6% in the day following and continued to slide the following week. Investors may be expecting a different kind of move in price in the week after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected in the near term; however, there is more room in the volatility range to support a move upward.
Verizon beat analysts’ EPS and revenue expectations. The company raised full-year profit and revenue guidance after a sizable increase in postpaid phone subscribers. Investors expressed ambivalence in the company, keeping the shares range bound. Option traders appear to be buying calls and selling puts, expressing bullish sentiment. This activity provides more room in the volatility range for an upward move in the share price in the near term.