Shopify (SHOP) Optimistic Traders Option, but …

Bullish traders pushed up Shopify Inc.’s (SHOP) share price ahead of its quarterly earnings announcement. There is no way to accurately predict the direction in which a stock will move after the announcement. However, a price action comparison between stock prices and option prices shows that while Shopify stocks fall, creating a return to its 20-day moving average in the first few days after profits, traders focus on the decline are able to capture the best profits.

Options trading represents the activities of investors who wish to protect their positions or speculators who wish to profit from the correct forecasting of unexpected movements of an underlying stock or index. This means that options trading is literally a bet on the odds of the market. By comparing the details of the price behavior of stocks and options, chart watchers can gain valuable insight, although it helps to understand the context in which that price behavior took place. The chart below illustrates the evolution of the Shopify share price and the setup leading up to the earnings report.

Current fashion

The one-month trend of the stock has the stocks moving sharply higher. It’s worth noting that over the past month Shopify’s prices were around $ 1,120 per share at the start of February and have continued to climb higher, closing at a high of $ 1,452 as the day approaches. the announcement. Price closed in the upper extreme region illustrated by the technical studies on this chart. Studies are formed with 20-day Keltner Channel indicators. These describe price points that represent a multiple of the actual average range (ATR) of the stock. This chart helps to highlight how the price has moved from the lower range to its upper extreme. This unusual move in the price of Shopify shares means investors remain very optimistic about the upcoming report.

In this environment where Shopify’s price trend has accelerated, chart watchers can recognize that traders and investors are expressing strong optimism about profits. It is therefore important for chart watchers to determine whether the move portends investors’ expectations for a favorable earnings report. Supporting evidence for the idea that investors expect good news from the company’s report can be found in the comparison of the range of volatility represented on the chart by the purple lines and the purple box in the background. Prices have moved with optimism; they are at the top of this range.

Trading activity

Options traders recognize that Shopify stocks are pushing higher and have rated their options as a bet that the stock will close in one of the two boxes shown in the chart between now and February 19, the Friday after. publication of the earnings report. The green box represents the price offered by sellers of call options. This implies a 75% chance that Shopify stocks will close in that range by the end of the week if prices rise. The red box represents the price of the put options with the same probability if the prices fall on the announcement. One thing to note is that the red and green boxes represent a wider price range than the movement Shopify stocks made in the week following the previous earnings announcement. This implies that option buyers on both sides expect a big change from this announcement.

It is important to note that Friday’s trading had over 18,000 calls traded versus approximately 13.00 puts, demonstrating the bias of option buyers. At present, any liquid stock in the market typically has puts representing 34% of the total of all options traded. The fact that nearly 41% of Shopify options volume is traded as put options means traders are a little more nervous than normal about announcing upcoming profits – maybe for a while. good reason since the price is trading so close to the upper edge of the volatility range.

The purple lines on the graph are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create strongly correlated regions of strong support and resistance to price action. These regions appear when the canal lines make a noticeable bend in the previous three months. The levels marked by the bends are annotated in the table below. What’s remarkable about this graph is that the call option price is so much closer to the upper line in this study than the put option price is to the lower limit. This suggests that buyers could run into impatient sellers as the price approaches that line which could lead to a price reversal.

These support and resistance levels show a lot less support for the price if they start going down and a lot more resistance for the price if they start going up. As a result, and due to the obvious bias that options buyers have towards good news, it is possible that bad news will surprise investors and could generate unexpected movement. After the previous earnings announcement, Shopify shares only rose 5% in the following days. Due to the wide range of volatility, it is quite possible that the price movement following the upcoming profit announcement is larger than last time.

Impact on the market

The effect of the Shopify earnings report alone is likely negligible for the market. However, the stock is heavily traded and the options on the stock are also actively traded. Therefore, no matter what the report says, price action may influence the perceived value of certain stocks in the tech sector and the cloud computing industry group. With over 50% of companies in the S&P 500 Index (SPX) having already reported earnings, and a large majority of them beating estimates, it is quite possible that investors can expect a positive surprise from Shopify. This could improve tech industry exchange traded funds (ETFs) such as the State Street Tech Sector SPDR Fund (XLK), the Invesco QQQ Trust Fund (QQQ) tracking the Nasdaq 100, and the WisdomTree Cloud Computing Fund (WCLD). ).

The bottom line

Options traders on Shopify favored calls with a narrower margin than usual over puts before the company’s results were announced. The current Shopify figures imply that investors expect good news but are nervous all the same. If the company signals unfavorable earnings or lower guides for any reason, Shopify shares could drop significantly due to lack of nearby support in the volatility range. The volatility price range shows that call options trading has taken into account the possibility for the stock to move beyond current volatility ranges. However, this range has not yet tightened, leaving open the possibility of further price increases.