After the Campbell Soup Company (CPB) reported that its fourth-quarter earnings exceeded analysts’ expectations, option traders are taking action that they believe stock prices will rise in the future. Given that the stock price rose 2% the day after the announcement, it may be natural.
Campbell Soup reports earnings per share (EPS) of $ 550 million and revenue of $ 1.87 billion, according to analysts’ expectations of EPS of $ 470 million and revenue of $ 1.81 billion. It exceeded. In the week before the announcement, investors raised stock prices slightly from the bottom of the extreme range, with numerous put options open.
Option trading volume indicates that the trader was buying put options and selling calls. However, post-earning options trading activity shows that traders are confident in CPB’s share price in the future. This is because price behavior has risen from the extreme lower bound, while options activity means that traders are buying calls and selling puts.
- Traders and investors bought shares in CPB after the earnings announcement, as the stock price rose 2%.
- CPB’s share price has recently surpassed the 20-day moving average.
- Put-and-call option activity seems to have the potential to raise stock prices.
- Volatility-based support and resistance levels allow for a stronger move to the downside.
- This setting creates an opportunity for traders to benefit from the reversal of revenue-based price fluctuations.
Options trading is a literal bet on market probabilities. On average, this is a bet made by a trader who is more informed than most investors. The key to maximizing insight into options trading is understanding the circumstances under which price fluctuations have occurred. The graph below shows the price action on the CPB’s share price as of September 3rd, showing the settings after the earnings report.
The one-month trend of stock prices rose after earnings after the stock price fell, well below the 20-day moving average, and ended in the middle of the range shown in the technical survey on this chart. These studies are formed by the 20-day Keltner channel index. These represent price levels that represent multiples of the average true range (ATR) of a stock. This array helps to highlight how the price fell to the lower end of the range before it rose towards the center after earnings.This price fluctuation Investors from CPB stocks mean they are confident in CPB’s stock price in the future.
NS Average True Range (ATR) It has become a standard tool for expressing past volatility over time. The typical average time used for that calculation is a period of 10 to 20 which includes trading for 2 to 4 weeks on the daily chart.
Chart watchers can recognize that traders were optimistic about earnings based on CPB price trends rising from the lower end of the volatility range the week before the announcement. Chart watchers can also comment on investor expectations by paying attention to the details of options trading. Prior to the announcement, traders seemed to expect CPB stocks to fall after earnings.
NS Keltner channel indicator Shows a set of semi-parallel lines based on a 20-day simple moving average and the top and bottom lines. This channel indicator is great for graphing past volatility, as the upper line is drawn by adding a multiple of ATR to the average and the lower line is drawn by subtracting a multiple of ATR from the average price. It will be a visualization tool.
A recent activity of option traders means that they think Campbell’s Soup stock is undervalued and have bought a call option. The box surrounded by a green frame represents the price offered by the seller of the call option. This means that Campbell Soop shares are 68% likely to close within or above this range by September 17th. Therefore, the seller is slightly bullish. However, buyers are skyrocketing this pricing, suggesting that buyers consider these options to be low-priced. Buyers seem willing to accept these long odds, as pricing means that the price is only 32% likely to close beyond this green box.
It is important to note that Friday’s open interest features over 60,000 call options compared to over 53,000 puts, indicating the bias that option buyers had. This usually means that options traders are expecting price increases. After profits, volatility declined dramatically, but the number of open-open put options declined. This shows a bullish feeling. For a financial strike and a step in either direction, the call volume exceeds the put volume. Out-of-the-money put volumes decrease at a much slower rate than out-of-the-money call volumes.
The purple line in the graph is generated by a 10-day Keltner channel survey set to 4 times the ATR. This measure tends to create a highly correlated area of strong support and resistance in price behavior. These areas are visible when the channel line turns prominently within the last three months.
Turnmark levels are annotated in the chart below. It’s worth noting in this chart that the pricing of calls and puts is very different and there is enough space to run downwards. This suggests that option buyers have a strong belief that prices will rise in the weeks following the report. Investors and option traders expected positive moves from the report, but stock prices have risen even further since the last earnings report.
These levels of support and resistance show a wide range of support and resistance to price. As a result, significant movement can occur in either direction in the near future. CPB shares fell 6.5% the next day after the previous announcement of financial results, and continued to fall the following week. Investors may be expecting another kind of price volatility the week after this announcement. Stock prices can rise or fall more than expected in the short term due to the large amount of room for volatility. However, there is room in the volatility range to support the downside move.
CPB exceeded analysts’ expectations for EPS and revenue. The day after the announcement, stocks rose 2%, staying in the middle of the volatility range, above the 20-day moving average. Options traders appear to buy calls and sell puts. This leads to a bullish outlook. However, this activity provides more room within volatility in case of future stock price declines.
Examples of options trading
As a bet on market probabilities, anomalous option activity can provide traders with insight into investor sentiment towards the company and explain what “smart money” is doing with bulk orders. One way to capture the bullish sentiment reflected in CPB’s post-revenue activity is to open a calendar spread.
Calendar spreads, also known as horizontal spreads, are an option strategy to buy and sell two options of the same type with different expiration dates but the same strike price at the same time. Calendar spreads allow traders to build transactions that minimize the impact of time. Calendar spreads are most profitable if the underlying asset does not move significantly in either direction until the short-term option expires.
For example, to capture the bullish sentiment of the CPB, selling a $ 45 call on October 1st will offer $ 0.33 credit at the break-even point of $ 45.33. The $ 45 purchase in January was $ 1.43, …