Berkshire Hathaway (BRK.B) Stock Outlook 2021: Option Traders Turn Bearish Despite Earnings Beat

Following Berkshire Hathaway Inc.'s (BRK.B) impressive fiscal Q2 2021 earnings beat, option traders are showing signs of waning confidence in the stock's near-term price trajectory. Despite the stock edging up less than 1% post-announcement, underlying option activity reveals a shift toward bearish sentiment.

BRK.B reported $64.4 billion in revenue and $11.71 billion in net income, surpassing analyst expectations. Prior to the earnings release, the stock price remained range-bound with significant call option interest, indicating optimism among investors.

However, post-earnings option volumes suggest traders are increasingly selling calls and buying puts, signaling expectations of a potential price decline. This is notable as the stock price has broken resistance levels and settled in the upper third of its volatility range, hinting at a possible reversal.

Key Insights

• Shares of BRK.B saw modest gains under 1% following the earnings announcement.
• The stock closed well above its 20-day moving average, indicating short-term strength.
• Option activity shows increased put buying and call selling, a bearish indicator.
• Volatility-based support and resistance metrics suggest more room for downward movement.
• Traders might capitalize on a potential reversal after the earnings-driven price rise.

Option trading reflects market probabilities and investor sentiment, often providing advanced insights beyond typical stock price movements. The chart below illustrates BRK.B's price action as of August 9, 2021, highlighting the post-earnings setup.

Current Market Trends

Over the past month, BRK.B's share price consistently held above its 20-day moving average, except for brief dips in mid-July. The stock closed near the top of its volatility range, as defined by 20-day Keltner Channel indicators, which use multiples of the Average True Range (ATR) to map price volatility.

This upward movement signals growing investor confidence ahead of the earnings report, with shares rising 1.9% the day before the announcement.

Trading Tips

The ATR is a widely-used tool to measure historical volatility, typically calculated over 10 to 20 trading days. It helps traders understand price fluctuations over several weeks.

Chart analysis shows that traders anticipated positive momentum before earnings, reflected by the stock's position above its 20-day moving average and increased call option buying.

Additional Insights

The Keltner Channel, based on a 20-day simple moving average with upper and lower bands set by ATR multiples, effectively visualizes volatility and potential support/resistance zones.

Option Trading Activity

Recent option trades suggest bearish positioning, with investors buying puts betting on a price decline by the August 20 monthly expiration. The pricing implies a 68% probability the stock will stay within or below the current range, with buyers willing to accept a 32% chance of a drop below this level.

On August 9, open interest showed over 300,000 call options versus 199,000 puts, indicating a historical bias toward upward price movement. However, declining implied volatility on calls suggests more selling than buying, hinting at growing caution.

The 10-day Keltner Channel at four times the ATR highlights strong support and resistance levels. Notably, option pricing disparities provide more room for downward movement, reinforcing bearish trader convictions after the earnings report.

These volatility bands suggest significant potential for price swings in either direction, though the downside appears more pronounced. After a 1.54% gain post-last earnings, expectations now lean toward more cautious or negative price action.

Summary

Despite beating earnings and revenue expectations, Berkshire Hathaway's stock price rose modestly and remains in the upper volatility range. Option traders' shift toward selling calls and buying puts signals a bearish outlook, providing room for a potential price decline.

Example Option Strategy

Unusual option activity can reveal "smart money" moves. To capitalize on bearish sentiment, traders might consider a debit put spread, which involves buying and selling put options at different strike prices but with the same expiration.

For instance, purchasing a September 10 $290 put for $8.10 and selling a $280 put for $2.42 results in a net debit of $5.68 per contract. This strategy profits if BRK.B falls below the breakeven price of approximately $284.32 by expiration, with a maximum gain capped at $432 and a potential return of 76% on risk.

While this strategy limits risk to the initial debit paid, it also caps potential profits. Traders should weigh these factors carefully when considering bearish option strategies.

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