May 25, 2022

StrategisChhr

Skillful Business Crafters

Uber Option Traders Favor Calls Ahead of Earnings

Investors have slightly bid up the share prices of Uber Technologies, Inc. (UBER) ahead of the company’s fiscal fourth quarter earnings announcement. Uber could be considered a “reopening” stock—a company that gains from the abatement of COVID-19 restrictions—as Uber benefits from more people out and about and traveling. Analysts are predicting that the ride-hailing app provider will report a net loss per share of $0.29 and $5.36 billion in revenue. These figures represent an expected 27% reduction in loss per share and a 69% increase in revenue on a year-over-year basis.

Uber remains a relatively “young” company—having IPOed in 2019—and is still in growth mode. The initial public closures of the COVID-19 pandemic severely affected the bottom line of a company that has yet to find its way to profitability. However, the company’s food delivery service kicked into overdrive during this time. Uber, which could be considered as synonymous with rideshare as Kleenex are with facial tissues, holds an estimated 69% of the U.S. ridesharing market and 37% of the global market, and it recently reported gross platform bookings at an all-time high, showing strong customer demand in recent months.

Option traders appear to be placing their bets that the Uber share price will rise in the near term. That’s because the open interest and recent trading volumes skew toward long call options, and speculative upside bets decline at a much lower rate than speculative bets made to the downside using puts.

Key Takeaways

  • Traders and investors have slightly bid up the share prices of Uber ahead of earnings.
  • The Uber share price recently closed below its 20-day moving average. 
  • Uber stock shows significant open interest that correlates to a thin zone of buying based on volume.
  • Trading volume and open interest appears to suggest that option traders expect upside for Uber shares.
  • The volatility-based support and resistance levels allow for a stronger move to the upside.

Reponing Sector

The COVID-19 pandemic affected the stock market in a variety of ways. After a large move to the downside in March 2020, the prolonged rebound rally carried many stocks and indexes to all-time highs. This market environment grossly affected stocks that benefit from people traveling—such as cruise lines, air lines, and stocks such as Uber. Conversely, this environment created a positive environment for “stay-at-home” stocks—companies that benefit from workers and consumers spending prolonged periods inside their homes.

With variants of COVID-19 continuing to have a prolonged effect on economies, it is possible to gauge economic sentiment by comparing these “reopening” stocks to “stay-at-home” stocks. The chart below compares Uber stock with the US Global Jets ETF (JETS), Zoom Video Communications, Inc. (ZM), and Peloton Interactive, Inc. (PTON).

JETS is an ETF that tracks airline stocks—companies that have been severely affected by the pandemic. Zoom and Peloton are companies that benefitted greatly from more people working and spending time at home. This chart highlights how, since the start of 2022, the “reopening” stocks of JETS and Uber have outperformed “stay-at-home” stocks Peloton and Zoom.

Price Action

An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Uber stock. The chart below depicts the recent price action for the Uber share price as of Monday, Feb. 7.

This chart highlights how Uber stock embarked on an extended downward trend after reporting earnings for the prior quarter, trading in a below average range until mid-December. Uber briefly traded above its 20-day moving average from mid-December 2021 to mid-January 2022, then fell below its 20-day moving average. The share price has recently risen slightly higher in the week before earnings.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators which depict price levels that represent a multiple of the average true range (ATR) for Uber stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing. It’s notable that these bands have remained at a relatively wide level, indicating that the stock, while trading in a wide range, has not had large, expected moves based on option pricing.

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.

Volume Profile and Options Look

Price action, in a vacuum, theoretically can indicate the overall sentiment toward any particular stock. However, providing further context to this price action can paint a clearer picture, while illuminating key details for chart watchers. The chart below illustrates the recent price action of Uber, in addition to a price-based volume pattern on the left-hand side.

The price-based volume pattern illustrates the prices where investors have bought and sold the shares previously. When volumes at a given price are scant, it implies that few, if any, investors have positions to defend at these levels. A significant amount of buying in the past often implies that traders and investors feel the need to defend their positions at those same prices by either buying more shares or at least not selling further.

There are two notable zones of price-based volume activity on this chart. On the low side, there is a thin zone of volume with a majority of selling around the $33 price level, indicated by the red rectangle. If the Uber share price were to move lower, this could be a pivotal price area, as it appears that there are not many investors defending positions at this price.

Conversely, there is a thin zone of buying to the upside of the recent closing prices of Uber. This area is roughly between the $40 and $41.50 price levels and is indicated by the green rectangle on this chart. If the Uber share price were to rise, this zone could act as support for the Uber share price going forward.

Recent option trading volumes for Uber favors calls over puts at a more than 2-to-1 ratio. In addition, the open interest features 1.6 million calls compared to 1.1 million puts. Both of these figures reflect a bullish outlook toward Uber stock; however, further analysis is required.

For Feb. 11, the next weekly option expiration date, the single option with the highest open interest is the $40 call, with more than 19,000. This option represents a 6% upside from the current share price. Total open interest for Feb. 11 features 116,000 calls compared to 47,000 puts. Speculative out-of-the-money call option open interest declines at a much slower rate than out-of-the-money put open interest, suggesting that a greater number of option traders see potential upside for Uber ahead of earnings compared to the number of traders willing to bet on the downside.

These 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, Uber shares rose by 2.76% in the day following and continued to rise the following week. Investors may be expecting the same 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.

Wrapping Up

Investors have recently slightly bid up the Uber share price ahead of the company’s fiscal fourth quarter earnings announcement. Option traders appear to be buying large amounts of call options ahead of earnings, implying bullish sentiment. If these bets were to unwind, it could place unexpected downward pressure on the Uber share price.

https://www.investopedia.com/uber-option-traders-favor-calls-ahead-of-earnings-5218466