3 Stocks Bargain-Hunting Contrarians Should Watch

Volatility expectations are low on Google Inc (NASDAQ:GOOGL), Foot Locker, Inc. (NYSE:FL), and Depomed Inc (NASDAQ:DEPO)

Sep 3, 2015 at 12:01 PM
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With second-quarter earnings season effectively wrapped up, it's become an opportune time for bargain hunters to purchase premium on options. One indicator we use to gauge whether an equity's near-term options are pricing in elevated volatility expectations is the Schaeffer's Volatility Index, or SVI.

At its most basic, the SVI averages the implied volatility of at-the-money front-month options to determine if they are "cheap" or "expensive," relatively speaking. Schaeffer's Quantitative Analyst Chris Prybal recently ran the numbers, and found that tech titan Google Inc (NASDAQ:GOOGL), athletic apparel retailer Foot Locker, Inc. (NYSE:FL), and pharmaceutical firm Depomed Inc (NASDAQ:DEPO) are currently sporting low SVIs. What's more, these outperforming equities are surrounded by skepticism, creating a possible ideal backdrop for bargain-hunting contrarians.

GOOGL, for instance, has rallied more than 21% year-to-date to trade at $644.64 -- versus a 4.5% loss for the S&P 500 Index (SPX) over the same time frame. What's more, the stock briefly pulled back after notching a record high of $713.33 in late July, but found a foothold atop its rising 50-day moving average -- and has a history of bucking the historically bearish September trend.

In the options pits, the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.80 sits in the 95th annual percentile. In other words, puts have been bought to open over calls at a near-annual-high clip in recent weeks. An unwinding of these bearish bets could help fuel GOOGL's fire.

Given Google Inc's technical tenacity, though, some of this action could be of the protective kind. Regardless, the equity's SVI of 31% sits lower than 99% of all other readings taken in the past 52 weeks, indicating GOOGL's near-term options are relatively inexpensive at the moment.

FL has tacked on an impressive 28.5% in 2015. The equity did succumb to the recent broad-market sell-off, but found support from its 80-day moving average. Since bouncing off this trendline on Aug. 24, the shares have added 12.7% to trade at $72.19 -- and are within a chip-shot of taking out their Aug. 18 all-time peak of $74.95.

Amid FL's run to record highs, short interest dropped 16.1% in the last two reporting periods, but still accounts for a healthy 8.7% of the security's available float. In fact, it would take almost two weeks to cover these remaining bearish bets, leaving plenty of opportunity for a short-covering rally to ensue.

Meanwhile, those wishing to bet on the equity's near-term trajectory with options are in luck. Foot Locker, Inc.'s SVI of 28% ranks in just the 2nd percentile of its annual range, meaning its short-term options are pricing in extremely low volatility expectations at the moment.

DEPO -- which is unsuccessfully being courted by Horizon Pharma PLC (NASDAQ:PLC) -- has surged more than 67% year-to-date, and topped out at a record high of $33.74 as recently as July 21. Since then, the shares have been lingering near $26.98, just north of their formerly resistant 80-day moving average.

Despite this flexing of technical muscle, the equity is bathed in skepticism. Its 10-day ISE/CBOE/PHLX put/call volume ratio of 2.38 sits just 2 percentage points from a 52-week peak. Plus, short interest accounts for nearly one-fifth of DEPO's available float, representing eight sessions' worth of pent-up buying demand, at typical volumes. A capitulation from some of the weaker bearish hands could translate into a fresh burst of buying power.

Finally, now is a prime time to purchase near-term options on Depomed Inc at a relative bargain. The security's SVI of 61% ranks in the 9th percentile of its annual range.

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