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Optimistic investors have bid up the share prices of Moderna, Inc. (MRNA) to an extreme range ahead of the company’s fiscal second quarter earnings announcement. At first glance, it appears that option traders are ready for a positive move, as there are a rising number of call options being bought and put options being sold in the open interest. This unusual option activity could create a strong downward trend in the price action if MRNA delivers a negative earnings surprise.
A sizable number of purchased call options and sold put options remain the open interest for MRNA, and option premiums are unusually high right now. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a favorable earnings report. If these bets were to unwind, it could result in unexpected downward pressure on the share price of MRNA.
Accurately predicting the direction a stock will move after earnings is difficult. However, a comparison between the stock’s price action and option trading activity shows that, if MRNA delivers a negative report, the company’s share price could fall significantly, moving closer toward its 20-day moving average after the report. This could happen because options are priced for a move upwards, but unexpected poor news could catch traders off guard and create a rapid decline in share price.
Key Takeaways
- Traders and investors have greatly bid up Moderna’s share price headed into the earnings announcement.
- The share price has recently been closing at the upper extremes of the volatility range.
- Call and put pricing is predicting a stronger move to the upside.
- The volatility-based support and resistance levels allow for a stronger move to the downside.
- This setup creates an opportunity for traders to profit from an unexpected earnings result.
By comparing the details of both stock price and option behavior, chart watchers can gain valuable insight, although it is imperative to understand the context in which this price behavior took place. The chart below illustrates the price action for the MRNA shares as of Tuesday, Aug. 3. This created the setup leading into the earnings announcement.
Current Trends
The one-month trend of MRNA stock has the share price pushing the extremes of the volatility range, primarily due to the stock being added to the S&P 500 and continuing necessary vaccinations for the coronavirus. Over the past month, the lowest MRNA share price was roughly $215 in early July, whereas the highest share price was almost $387, an all-time high, in early August, just two days before the announcement.
The price closed in the top of the upper 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 risen well above the 20-day moving average in the week before earnings. This price move from MRNA shares implies that investors are extremely bullish ahead of earnings.
Tip
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 MRNA has remained in an extremely elevated range, chart watchers can recognize that traders’ and investors’ confidence is growing going into earnings. It is notable that, in the week before earnings, MRNA’s share price rose to its all-time high. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for a favorable earnings or not.
Option trading details can provide additional context to help chart watchers form an opinion about investor sentiment. Recently, option traders are favoring calls over puts by a decent margin. Normally, this volume suggests that traders are expecting a positive earnings report; however, it’s necessary to understand the context of this volume.
Tip
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.
Trading Activity
Option traders recognize that MRNA shares have risen to an extreme range 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 Aug. 6, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 38% chance that Moderna shares 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 31% probability if prices go lower on the announcement.
It’s necessary to note that the open interest featured over 258,000 call options compared to roughly 286,000 puts. At first glance, this would illustrate that option buyers had a bias toward puts over calls. However, because the put option implied volatility is falling, it can be inferred that traders are selling these options rather than buying them. This implies that option traders expect a rise in share price. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of put options being sold has only mildly pushed expectations higher.
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 downwards. This suggests that option buyers don’t have a strong conviction about how the company will report, even though call volume outweighs put volume. Although investors and option traders do not expect it, a surprising report could 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, MRNA shares rose by 1.65% the day after earnings, before falling 2.8% the next day and continuing to fall for the next week. Investors may be expecting a different kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.
Market Impact
Moderna is one of the largest providers of the COVID-19 vaccine and a fresh entrant to the S&P 500, so its earnings results could affect indexes directly. No matter what the report says, it will likely have a noticeable effect on stocks in the health care sector. A positive report could lift other stocks in the sector such as Johnson & Johnson (JNJ), Pfizer Inc. (PFE), or Eli Lilly and Company (LLY). It could also affect exchange traded funds (ETFs) such as State Street’s S&P 500 Index ETF (SPY) and Invesco’s QQQ Trust ETF (QQQ).
