Investors have kept the share prices of Intel Corporation (INTC) range bound ahead of the announcement of its second quarter earnings report. With a growing number of out-of-the-money call options in the open interest, it appears that options traders are positioned to anticipate a positive move. The unusual option trading may create a strong upward trend in the price action if INTC delivers a positive earnings surprise.

A sizable collection of call options seems to be growing in the open interest for INTC, and option premiums are unusually high right now. Option trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings announcement. Unwinding their bets could result in downward pressure on the price of INTC.

Accurately predicting the direction a stock will move after earnings is difficult. However, a comparison of the price action between option trading activity and stock prices shows that, if the company delivers a negative report, INTC shares could fall significantly, further below its 20-day moving average in the first few days after the announcement. This could happen because options are priced for a small move, but unexpected poor news could catch traders by surprise and create a rapid decline in price.

Key Takeaways

  • Traders and investors have kept the price of Intel shares in a relatively tight range headed into the announcement.
  • The price has recently been closing just below its 20-day moving average.
  • Put and call pricing is predicting a stronger upwards move.
  • The volatility-based support and resistance levels allow for a move in either direction.
  • This setup creates an opportunity for traders to profit from an unexpected result.

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 this price behavior is better understood with context. The chart below shows the price action for INTC shares as of Wednesday morning. This illustrates the setup leading into the earnings report.

Earnings setup for INTC

Current Trends

The one-month trend of the stock has the shares remaining in a fairly tight range. Notably, over the past month, the highest INTC share price was near $56 in late June, and the lowest share price was roughly $54, a few days before the announcement. The price closed in the middle 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 moved around but mostly held in an average range all month. This price move from INTC shares implies that investors do not have expectations of a large change from the upcoming report.

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 the context where the price trend for INTC has been holding in a middle range, chart watchers can recognize that traders and investors are expressing ambivalence going into earnings. In the week before earnings, the share price gradually declined, closing below the 20-day moving average the next week. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for a favorable earnings report or not.

Option trading details can provide additional information to help chart watchers form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a slim margin, as the open interest on options has a greater number of calls than puts. This normally suggests that investors are expecting good news from the company report. However, in this circumstance, traders are expecting that INTC won't move strongly, up or down, after earnings.

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 INTC 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 July 23, the Friday after the earnings report is released. The green-framed box represents the pricing that the call option sellers are offering. It implies a 38% chance that Intel shares will close inside this range by the end of the week if prices go higher. The red box represents the pricing for put options with a 33% probability if prices go lower on the announcement.

It is important to note that the open interest featured over 1,100,000 call options active compared to roughly 1,000,000 put options, demonstrating the bias that option buyers had, as calls outweighed puts. This unusually equal amount of calls and puts normally implies that option traders are unsure of a jump in price. However, because the call box and the put box are relatively equal in size, it tells us that the nearly equal percentage of call and put options traded has not skewed expectations higher or lower. This circumstance implies a far more complacent outlook.

Option pricing for INTC

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 on either side to run. This suggests that option buyers don't have a strong conviction about how the company will report, even though calls are being purchased over puts. Although investors and option traders do not expect it, a surprising announcement would push prices dramatically in either direction.

Volatility pattern for INTC

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, INTC shares fell by 5.3% in the day following and continued to drop the following week. Investors may be expecting a different kind of move in price after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected, but there is more room in the range for prices to move higher.

Market Impact

INTC shares typically make large moves after earnings, so the result could move index prices directly. However, no matter what the report says, it will likely have a significant impact on stocks in the Technology sector.

It will be interesting to keep an eye on news regarding the semiconductor shortage and if Advanced Micro Devices, Inc. (AMD) will continue to cut into Intel's market share. A positive report could lift other stocks in the sector such as AMD, Apple Inc. (AAPL), or Taiwan Semiconductor Manufacturing Company Limited (TSM). It would also affect exchange-traded funds (ETFs) such as State Street's Technology Sector Index ETF (XLK) and potentially Invesco's QQQ Trust ETF (QQQ).