Tech stock gets jump on earnings

Everyone anticipates the possibility of volatility after an earnings release, but what to make of a big, seemingly unexpected move a week before the numbers come out?

That was the situation on Thursday when software company JFrog (FROG) rallied more than 8% intraday, extending its recent breakout and hitting its highest level in more than two years:

The move also pushed the stock more than 80% above its late-October lows, although shares are still well below the all-time high of $95.20 they set shortly after launching in 2020.

Despite the rally, though, there wasn’t any news about FROG crossing the wire on Thursday—in fact, the ticker’s only recent mentions were from January 25 and February 6, both of which were about company insiders selling shares. There is news on the horizon, though—the company is scheduled to release earnings next Wednesday, February 14. The stock’s previous earnings announcement, in early November, kickstarted its end-of-year rally.

Thursday’s rally in the stock was accompanied by heavy call options trading, enough to land FROG on the LiveAction scans for highest call-put ratios and unusual call volume (as well as the scan for biggest one-day implied volatility increases):

While unusual options volume is often the result of one or two exceptionally large trades, in this case the activity was spread across several contracts, none of which had volume of more than 1,000 by noon ET. Trading was concentrated mostly in the $35-$50 strikes, in both the February and March expirations:

With the stock opening at $37.56 on Thursday and trading as high as $39.44, that meant most of the activity was in out of-the-money (above the current stock price) calls.

While a breakout move accompanied by heavy call options volume shortly before earnings may sound like bulls making their presence felt, there’s another side to this coin. Beyond the reality that there’s a seller for every buyer—that is, someone with a potentially opposing market outlook—volume was less than the open interest (OI) in the two most active contracts, the February and March $40 calls. That means at least some of that activity could be traders liquidating existing positions rather than opening new ones. Today’s totals should clarify that part of the equation.

Then there’s the matter of the stock’s rally itself. Thursday’s move pushed FROG above the Street’s average analyst target of $38.75 (the highest is $45).¹ Analysts certainly aren’t always right, and these targets get revised all the time as new information (e.g., earnings) comes to light. So, the fact that a stock is trading above a forecast doesn’t mean it can’t keep doing so. But it is at least a reminder to consider what, if any, future catalysts could continue to fuel the move.

Perhaps FROG’s earnings next week will shed some light on that topic. In the meantime, today’s OI may indicate whether traders were getting into or out of the market on yesterday’s rally.

Market Mover Update: The stock market hasn’t been the only thing setting records lately. The price of cocoa, which has doubled over the past year, pushed to new all-time highs this week, surpassing records it set back in 1977. May cocoa futures (CCK4) pushed as high as 5,600 on Thursday—their 10th-straight up day, and 20th out of the past 22.

Today’s earnings include: Global Payments (GPN), PepsiCo (PEP), W.P. Carey (WPC).

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¹ TipRanks. JFrog (FROG) Stock Forecast & Price Target. 2/8/24.