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- Traders and investors have driven the price of Walmart shares lower heading into the announcement.<\/li>\n
- Walmart's stock price has been closing well above its 20-day moving average.\u00a0<\/li>\n
- Put options are priced for a larger drop and call options for a smaller gain.\u00a0<\/li>\n
- The volatility-based support and resistance levels allow for a strong move in either direction.\u00a0<\/li>\n
- This setup creates an opportunity for traders to profit from an unexpected result.<\/li>\n<\/ul>\n
Option trading represents the activities of investors who want to protect their positions or speculators who want to profit from correctly forecasting unexpected moves in an underlying stock or index. That means option trading is literally a bet on market probabilities. By comparing the details of both stock and option price behavior, chart watchers can gain valuable insight, although it helps to understand the context in which this price behavior took place. The chart below depicts the price action for Walmart's share price and the setup leading into the earnings report.<\/p>\n
![](\"https:\/\/www.investopedia.com\/thmb\/zIqU4XwelsgB7g9f15wSUOlG7g8=\/1200x541\/filters:no_upscale():max_bytes(150000):strip_icc()\/wmt1-c0c926228cef4cb88ca721ec33421867.jpg\")
<\/p>\nCurrent Trend <\/span> <\/h2>\n
The one-month trend of the stock has the shares remaining in a medium range with a slight downward trend. It is notable that over the past month\u00a0Walmart fell to $139\u00a0per share at the beginning of February\u00a0with only a slight\u00a0retracement as the announcement day draws near. The price\u00a0closed in the middle region\u00a0depicted by the technical studies on this chart. The studies are formed with 20-day\u00a0Keltner Channel\u00a0indicators. These depict price levels that represent a multiple of the\u00a0Average True Range\u00a0(ATR)\u00a0for the stock. This array helps to highlight the way the price has moved\u00a0from the lower extreme back to its average range and held in that range. This price move for Walmart shares implies that investors may be cautiously optimistic for the upcoming report.<\/p>\n
Tip<\/h3>\n
The Average True Range (ATR)<\/strong> 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 one to two weeks of trading on a daily chart.<\/p>\n
In this context where the price trend\u00a0for Walmart has been holding in a middle range, chart watchers can recognize that traders and investors are expressing uncertainty going into earnings. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for a\u00a0favorable earnings report or not.\u00a0<\/p>\n
Option trading details can provide additional information to help chart watchers form an opinion about investor expectations. Option traders are favoring calls over puts, suggesting that investors are expecting good\u00a0news\u00a0from the company report. Supporting evidence can also be found in the comparison of the volatility range depicted on the chart by the purple lines and the purple box in the background. Even though\u00a0prices have remained in such a tight range, they are drifting toward the upper half of the volatility range. This position for the price suggests that investors may not be as pessimistic as it appears.<\/p>\n
Tip <\/h3>\n
The Keltner Channel indicator<\/strong> 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, this channel indicator makes for an excellent visualization tool when charting historical volatility.<\/p>\n
Trading Activity <\/span> <\/h2>\n
Option traders recognize that Walmart shares are average 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\u00a0Feb. 19,\u00a0the Friday after the earnings report is released. The green-framed box represents the pricing that the call option sellers are offering. It implies a 72% chance that\u00a0Walmart shares will close inside this range by the\u00a0end of the week if prices go higher. The red box represents the pricing for put options with a 74% probability that prices go lower on the announcement.<\/p>\n
It is important to note that trading on Tuesday featured\u00a0over 69,000 call options\u00a0traded compared to\u00a0roughly 28,000 put options,\u00a0demonstrating the bias that option buyers had. That only 28% of the trades were put options implies that option traders are slightly optimistic, as shown in the chart below.<\/p>\n
![](\"https:\/\/www.investopedia.com\/thmb\/KYbC7U0SdETlbTooY6I-R1D48jE=\/1202x533\/filters:no_upscale():max_bytes(150000):strip_icc()\/wmt2-49d72f9cf68942c693774a691b6dbf05.jpg\")
<\/p>\nThe\u00a0purple 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\u00a0support\u00a0and\u00a0resistance\u00a0in the\u00a0price action. These regions show up\u00a0when the channel lines make a noticeable turn within the\u00a0previous three months. The levels that the turns mark\u00a0are\u00a0annotated in the chart below. What is notable in this chart is that the call and\u00a0put\u00a0pricing are in such a close range with\u00a0plenty of space on either side to run. This suggests that option buyers don't have a strong conviction about how the company will report. However, the\u00a0put option range is much larger than the call option range, suggesting that investors have their doubts about the company's results.<\/p>\n
![](\"https:\/\/www.investopedia.com\/thmb\/RTU2QrVjxC6WEJkWXfi2ZYbolnc=\/1167x516\/filters:no_upscale():max_bytes(150000):strip_icc()\/wmt3-0af0865f0a4740a98b40b945efd39580.jpg\")
<\/p>\nThese support and resistance levels show a large range of support and resistance for prices. As a result of this, 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, Walmart shares rose by under 2% in the days following. Investors may not be expecting the same kind of small move in price after this announcement. With lots of room in the volatility\u00a0range, share prices could rise or fall more than expected.<\/p>\n
Market Impact <\/span> <\/h2>\n
The effect of Walmart's earnings report is influential to the market because of the company's size. Even so, Walmart shares typically make only mild moves after earnings, so the result doesn't move index prices directly. However, no matter what the report says, it will likely have a significant impact on stocks in the consumer staples sector. With more than 50% of S&P 500 components having reported earnings by now and a large majority of them beating estimates, investors will expect Walmart to beat estimates. Anything less would be a shock. A positive report could lift consumer staples stocks and\u00a0exchange traded funds\u00a0(ETFs) such as State Street's Consumer Staples Select Sector SPDR Fund (XLP), but a negative\u00a0surprise\u00a0would not only weigh on XLP but on broad market issues such as State Street's SPDR S&P 500 ETF Trust (SPY).\u00a0\u00a0<\/p>\n
The Bottom Line <\/span> <\/h2>\n
Option traders on Walmart favored call options by a strong margin over put options before the company's earnings announcement. Investors are clearly expecting good news even though they've been selling shares lower lately. If a bad report does materialize, Walmart shares could drop substantially, but traders are discounting that possibility. Right now,\u00a0the call options are priced for Walmart to make a taller-than-usual\u00a0jump. This implies that options traders are anticipating very good news or that they have wildly\u00a0overpriced the call options. The volatility price range size is enough to\u00a0exceed both call and put pricing, allowing for a large move. However, Walmart shares are not known for making strong moves in the five days after an earnings announcement.<\/p>\n