What Happened: Unity Software Inc. (NYSE: U) posted a mild earnings beat Tuesday after the close reporting a 6-cent loss (a penny better than expeected), but the brighter spot came with the sales numbers coming in at $286 million versus $264 million expected.
Initially, the market sold off on the earnings release but today found a bid on the open (as you can see in the 5-minute chart below).
Volume has been strong Wednesday with over 9.4 million shares traded, which is well above the 10-day average of 3.6 million shares. This suggests strong retail and institutional interest when a stock is trading well above its 10-day average in terms of volume.
Looking at the option flows, prior to today, Unity Software had about 144,000 calls and 95,000 puts for a total of 239,000 options. However, today alone the stock has traded over 65,000 options, which is over 27% of the total open interest. And for the 65,000 options traded today, 51,000 are calls and 14,000 puts, so more than three out of every four options traded today are calls.
Why It Matters: Clearly there is a lot of call buying as option traders are taking a bullish view on the stock. The earnings release plus a positive news catalyst with a report that Unity Software acquired the “Lord of the Rings” and “Avatar” visual effects company is likely the reason behind the strong option and stock volumes on the day.
It’s important to note Unity Software only trades monthly expiries, so the next expiry is on Nov. 19. That means there is no short-term pressure of the current options being monetized because there is no weekly expiry coming this Friday.
What’s Next: Prior to today, about 34% of the options are expiring on Nov. 19. Of the 65,000 options traded today, about 39,000 of them are expiring on the 19th with the largest strikes between $185 and $200 (image below).
This large cluster of strikes could pull the stock back up to the $185 price, which is only a few dollars below the intra-day highs, possibly even up to the $200 strike before encountering resistance as there are over 6700 calls at $200, which is three times the current open interest.
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