Shopify (SHOP) Options traders insensitive to declining profits

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After Shopify Inc. (SHOP) announced that it had beaten analysts’ expectations for its fiscal second quarter financial results, options traders take action that implies they believe the stock price will rise in the future. This may be surprising given that the SHOP share price fell less than 1% the day after the report was announced.

SHOP reported earnings per share (EPS) of $ 2.24 billion and revenue of $ 1.12 billion, beating analysts’ forecasts of $ 0.97 from EPS and $ 1.04 billion from turnover. Notably, the company updated its outlook for 2021 but did not provide specific guidance for the third quarter and beyond. Prior to the announcement, investors had kept the share price of the Shopify lineup limited, with a large number of call options in open interest.

Option trading volumes indicated that traders had bought call options and sold put options; However, options activity after earnings suggests traders are still confident in the SHOP share price going forward. Indeed, while the price action fell slightly below the share price before earnings, it appears to have found support, remaining just above the 20-day moving average, while activity on options implies that traders continue to buy calls and sell puts.

Key points to remember

  • Traders and investors sold shares of SHOP after the results were announced, with the stock falling less than one percent.
  • The SHOP share price moved closer but remained just above its 20-day moving average.
  • The activity of puts and calls appears to be positioned for the price to rise.
  • Support and resistance levels based on volatility allow stronger downward movement.
  • This setup creates an opportunity for traders to profit from a profit-based reversal in stock price movement.

Options trading is literally a bet on the odds of the market, a bet made by traders who are, on average, better informed than most investors. The key to maximizing the understanding of options trading activity is to understand the context in which the price movement has taken place. The chart below illustrates the development of the SHOP share price on August 6, showing the pattern after the earnings report.

Current trends

The one-month stock trend saw the stock price drop from its all-time high in late July to a relatively mid-range after the announcement. The price has fallen into the middle range, illustrated by the technical studies on this chart.

These studies consist of indicators of the Keltner canal at 20 days. These describe price levels that represent a multiple of the Average True Range (ATR) for the stock. This table helps to highlight how the price fell from the upper region of this range to the middle limits. This price movement SHOP stock implies that investors have valued SHOP at a lower level in the future.

Point

the Average True Range (ATR) has become a standard tool for describing historical volatility over time. The typical average duration used in its calculation is 10 to 20 periods, which includes two to four weeks of trading on a daily chart.

Chart watchers can recognize that traders were expressing their profit optimism, based on SHOP’s price trend closing above its 20-day moving average. Chart watchers can also form an opinion on investor expectations by paying attention to the details of options trading. Before the announcement, traders seemed to expect Shopify shares to rise after profits.

Point

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. Since the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting an ATR multiple from the average price, this channel indicator makes a great visualization tool when charting. historical volatility.

Commercial activity

The recent activity of options traders implies that they view SHOP stocks that are undervalued and have bought call options as a bet that the stock will close in the box shown in the chart between today and the August 20, the next monthly options expiration date. The box framed in green represents the price offered by the call option sellers. This implies a 69% chance that SHOP stocks will close in that range or more by August 20. The sellers are therefore only slightly bullish. However, buyers are snapping up this price, suggesting that buyers view these options as undervalued. Since pricing only implies a 31% chance that prices could close above that green box, it looks like buyers are ready to take those long odds.

It is important to note that the interest opened on August 6 had over 120,000 calls against more than 93,000 puts, demonstrating the option buyers bias, with traders preferring calls to options. of sale. This normally implies that options traders expect price action to rise. After earnings, volatility has decreased significantly, but the number of call options in open interest is increasing and the number of puts has decreased. This signals that call options are being bought, creating a bullish sentiment.

For cash strikes and a two-way street, call volume far exceeds sell volume. Out-of-the-money call option volumes are declining at a slower rate than out-of-the-money puts volume, which would mean that more traders believe that SHOP stock prices will rise than those who believe. that stock prices will go down.

The purple lines on the graph are generated by a 10-day Keltner Channel study set at four times the ATR. This metric tends to create highly correlated regions of strong support and resistance in price action. These regions appear when the channel lines make a noticeable turn during the previous three months.

The levels that the bends mark are annotated in the table below. What’s remarkable about this graph is that the buy and sell prices are so different with a lot of room to work either way. This suggests that option buyers are more convinced that the price will drop in the weeks following the report. Although investors and options traders expected the report to move positively, the share price has moved less downward than after the last earnings report.

These support and resistance levels show a wide range of support and resistance for the price. As a result, it is possible that there will be a big movement in either direction in the near future. After the previous earnings announcement, SHOP shares fell 4.3% the next day before falling the following week. Investors can expect a different price change within a week of this announcement. With plenty of room in the volatility range, stock prices could rise or fall more than expected in the short term; however, there is room in the volatility range to support a move in either direction.

Wrap

Shopify has exceeded analysts’ expectations in terms of EPS and revenue. The company updated its outlook for 2021 but did not provide specific guidance, leading some traders to sell their shares, sending the share price to the middle end of the volatility range on the markets. graphics. Options traders appear to be buying calls and selling puts, reflecting a bullish outlook. This activity provides an equal margin in the volatility range for an upward or downward movement in the stock price in the future.


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