AT&T (T) Losing Steam Ahead of Earnings

Investors have recently bid down the share prices of AT&T Inc. (T) to an average volatility range ahead of the company's fiscal fourth quarter earnings report. Analysts expect the telecom giant to announce $0.75 in earnings per share (EPS) to pair with $40.45 billion in revenue. Investors will be looking for any update on the in-progress separation of WarnerMedia and what AT&T's post-WarnerMedia business could look like.

A growing number of call options remain in the open interest for AT&T, and option premiums are unusually high ahead of the company's earnings report. Trading volumes indicate that traders have been buying call options and selling puts in anticipation of a favorable earnings result. However, AT&T stock has recently fallen from elevated price levels. If speculative option bets were to unwind, it could create downward pressure on the share price of AT&T, especially as there is a potential gap to fill to the downside.

As sector rotation continues in an effort to predict the next step of the economic cycle, the communications sector has performed in line with the market at large, yet AT&T has outperformed. Over the past month, State Street's Communications Sector ETF (XLC) has fallen by 7.7%, while State Street's S&P 500 Index ETF (SPY) has shed 7.8%. In that same time frame, AT&T stock has risen by 6.3%.

Price Action Analysis

An analysis of recent option activity combined with technical analysis of share price movement can grant chart watchers valuable insight into the overall sentiment toward AT&T ahead of earnings. The chart below illustrates the recent price action for the AT&T share price as of Monday, Jan. 24.

The chart illustrates how AT&T shares had been in a relative downward trend since the company reported earnings in the previous quarter, highlighted by the red arrow. After falling to an extreme low of the volatility range in mid-December, the AT&T share price trend reversed and began an upward trend, which ended in mid-January. This trend is highlighted in blue and helps to demonstrate how the AT&T share price rose well above its 20-day moving average before fading closer to this level as earnings approached. The AT&T share price has recently closed in the middle of the range depicted on the chart in purple.

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). 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 briefly widened in mid-December and have since remained wide despite the share price rising. This could mean that option pricing is growing ahead of the AT&T earnings announcement.

Volume Profile

Comparing price action and option trading can provide chart watchers insight into the sentiment traders and investors hold toward a company's future performance. However, further context of price action in terms of volume could illustrate areas of support and resistance, which could provide additional context to option open interest. The chart below illustrates the recent price action of AT&T, in addition to a price-based volume pattern on the left side.

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

There appears to be a notable zone of higher than normal buying at the current share price level. This range is highlighted by the green rectangle. This area could act as a support level for the AT&T share price going forward. It's notable that, below this range, there appears to be a recent gap from around $26 to roughly $25.

Option Trading Details

Option trading can provide chart watchers additional context to help them form an opinion about expectations that investors may have. Recently, option traders are favoring puts over calls by a slim margin. On Monday, Jan. 24, there were over 165,00 puts traded compared to 160,000 calls. Normally, this volume indicates that traders are feeling bearish toward the upcoming earnings result, although further analysis is required.

The open interest for AT&T currently features 1.7 million calls compared to 1 million puts. At first look, it would appear that the open interest is much more bullish than recent trading volumes. However, further understanding of how this open interest is shaped can provide even further context.

For Jan. 28, the next weekly option expiration date, the highest open interest is on the $26 call, with 22,000. In fact, the three strikes with the highest open interest occur at $27, $27.50, and $28, on the call side of the option chain. These three strikes account for more than 40% of the open interest for Jan. 28. While these options don't represent much upside from the current share price of AT&T stock, it is nonetheless bullish.

It's also notable that, for Feb. 4, or the next weekly option expiration date after Jan. 28, there are over 100,000 options in the open interest for the $28 call. This is nearly the total open interest for all strikes of calls and puts for the Jan. 28 expiration date. This strike represents 6% upside to the current price of AT&T stock.

Sector Performance and Breakdown

The communications sector is made up of companies that make communication possible on a global scale—whether it is through the phone or internet, through airwaves or cables, through wires or wirelessly. The largest companies in the sector are telephone operators, satellite companies, cable companies, and internet service providers.

With close ties to the technology sector, the communications sector could be considered a riskier investment during times of inflation, simply for the fact that investors could seek safe havens for their money. The chart below compares the recent performance of AT&T with State Street's Communications Sector ETF (XLC) and nine of the top sectors of the S&P 500 Index ETF (SPY).

It's notable on this chart that AT&T has recently outperformed the market and each individual sector outside of energy (XLE). The communications sector, with its close ties to the technology sector (XLK), has actually recently been one of the worst performing sectors of the market, trailed only by sectors that have historically underperformed in an inflationary environment—technology, consumer discretionary (XLY), and healthcare (XLV).

As for the communications sector itself, AT&T has fared better than each of the top ten holdings of XLC, as seen on the chart below.

Wrapping Up

Investors will be paying close attention to the earnings of AT&T as one of the leaders of the telecom services industry of the communications sector. Investors have recently bid down the share prices to an average range, while option traders appear to be placing their bets that the AT&T share price can rise back near the top of the volatility range.