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Chart Advisor: Hitting Resistance

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Wednesday, 1st December, 2021

1/Indexes fall as volatility increases 

2/ Option traders not giving up on Salesforce

3/ Traders may be quietly bullish on ORCL 

4/ The bottom line

1/ Indexes Fall as Volatility Increases 

Major averages finished lower in a major reversal over news of the first U.S. case of the omicron variant of COVID-19 and continued hawkish statements from Jerome Powell, chairman of the Federal Reserve.  

The chart below compares the S&P 500 Index (SPX) with CBOE’s Volatility Index (VIX). The VIX is a volatility measure derived from option prices of SPX. The VIX rises when SPX option prices are high, because traders expect larger SPX price changes in the future. As a result, SPX and VIX tend to have an inverse relationship. This has also given birth to the VIX’s nickname of the “fear gauge”. 

The recent upward trend of SPX was not met with an equal downturn of the VIX. This could mean that investors were wary about the swift rise in SPX prices and remained positioned for a near-term pullback. The recent spike in volatility the last few days has greatly outpaced the moves in SPX.

2/ Option Traders Not Giving up on Salesforce

Investors have sold off shares of Salesforce (CRM) after the company reported earnings for the fiscal third quarter. Analysts expected CRM to announce $0.92 in earnings per share (EPS) and $6.8 billion in revenue. CRM beat on both metrics, reporting $1.27 in EPS and $6.86 billion in revenue.  

The company’s guidance for the next quarter was lower than expected, which prompted investors to bid down CRM by 10%. The earnings-based share price decrease pushed CRM shares to the lower extreme of the volatility range, as illustrated on the chart below.  

It should be noted that after accounting for intrinsic value, call options are priced higher than puts. Trading volumes could be close because put option buyers prior to earnings are closing their positions for a profit, while traders buy call options at a perceived discount.  

3/ Traders May be Quietly Bullish on ORCL 

As CRM sells off after forward guidance in its earnings report, competitor Oracle (ORCL) remains in a slight downward trend but gained 0.5% today. ORCL is expected to release earnings in early December, with analysts forecasting $1.11 in EPS to go with $10.2 billion in revenue

Option traders appear to be positioning themselves for ORCL stock to rise in the near term. The open interest for ORCL features 271,000 call options compared to 255,000 puts and the recent trading volumes on Wednesday favor calls over puts 2-to-1. Moreover, call options are priced higher than puts after accounting for intrinsic value, indicating that even with higher prices, option traders are willing to place their bets on those options paying off in the future.  

The chart below compares the recent performance of ORCL with CRM and State Street’s Technology Sector ETF (XLK). CRM’s earnings-based share price slide now places both CRM and ORCL behind XLK. This is despite ORCL outpacing XLK year-to-date, with each having gained 43% and 32% in that span. CRM, meanwhile, has only added 16% since the start of 2021.   

4/ The Bottom Line 

Stock indexes sold off and the VIX showed increasing levels of volatility. Investors appear nervous, but some option traders are looking to buy call options even as stocks like CRM and ORCL are falling in price. 

Originally posted on 1st December, 2021

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