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Option Idea of the Week: Pandora Media Inc (P)

Pandora continues to be music to the bullish traders' ears

by 3/14/2014 11:50:14 AM
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Streaming music provider Pandora Media Inc (NYSE:P) has been a force to be reckoned with. In a solid uptrend since late 2012, the shares have gained roughly 147% during the last 12 months, and are up more than 30% in 2014 alone. The stock also hit a new all-time high of $40.44 earlier this month, but has consolidated somewhat during the last several sessions. As such, it could be an opportune time to revisit the shares.

On the charts, the stock this week tested support at its 80-day moving average and subsequently bounced. According to our Senior Quantitative Analyst Rocky White, tests of this trendline have historically been positive indicators. In fact, the average 21-day return for Pandora shares following a retest of this trendline is a whopping 34%.

Daily Chart of P since December 2012 With 80-Day Moving Average

On the news front, Pandora's subscriber base continues to grow, despite competitive challenges. In February, the company had 75.3 million active listeners, a year-over-year increase of 11%. Listening hours also rose 9% from February 2013.

Despite this technical and fundamental strength, however, P has seen more than its fair share of pessimism. From the 22 brokerage firms following the stock, for example, Pandora has earned nine "hold" ratings plus one "strong sell." What's more, the consensus 12-month price target of $35.88 is just a hair above the stock's current price of $34.81. P shares could benefit if analysts opt to lift their ratings and/or price targets, following in the footsteps of BofA-Merrill Lynch, which on March 7 boosted its price target for the stock by $6.

Elsewhere, nearly 14 million Pandora shares have been sold short, amounting to almost 8% of the stock's available float. Short sellers have recently begun to flood toward the exits, as short interest declined by 21% during the last two reporting periods. Continued short-covering activity could fuel additional gains in the stock.

Finally, on the options front, Schaeffer's put/call open interest ratio (SOIR) for Pandora indicates that short-term options players are more put-focused than usual. Specifically, the ratio stands at 1.11, which is 8 percentage points away from an annual high. An unwinding of hedges related to out-of-the-money puts -- such as those open at the March 34 strike -- could help provide a contrarian tailwind.

Options traders looking to speculate on additional upside in the shares could consider purchasing the in-the-money June 27 call, currently asked at $9.20.

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