Seagate Technology PLC (STX) Presents a Bargain for Contrarian Option Bulls

Seagate Technology PLC (NASDAQ:STX) hit a fresh annual high today, but the stock is surrounded by lingering pessimism

Nov 22, 2016 at 11:53 AM
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Data storage specialist Seagate Technology PLC (NASDAQ:STX) hit a fresh annual high this morning, at $40.10. Last seen off 0.4% at $39.65, the stock is still sitting on a healthy year-to-date gain of roughly 8%. Despite some impressive technical feats over the past six months, however, STX stock is surrounded by pessimism, meaning there is plenty of fuel remaining to help the shares run higher. Plus, the option's market is signaling a particularly attractive opportunity for contrarian traders at the moment.

Taking a quick look at the stock's technical performance, STX has more than doubled in value from its mid-May four-year low of $18.42. Amid their most recent run higher, the shares broke out above the $37-$38 region, which had contained the tech stock since last December. Plus, STX has outperformed the broader S&P 500 Index (SPX) by more than 17 percentage points over the last three months.

STX Daily Chart Nov 22

The brokerage bunch has barely budged on their lukewarm outlooks, even after STX easily beat expectations for earnings last month. At present, 16 out of 23 analysts tracking the stock maintain a "hold" or worse rating. What's more, the average 12-month price target of $38.83 now sits at a discount to STX's trading levels. Put simply, a round of overdue upgrades and/or price-target increases could create tailwinds for the shares.

Short interest on STX is also elevated, with the 37.6 million shares sold short -- the most since mid-April -- representing nearly 13% of the equity's available float. At the average daily volume, it would take more than seven sessions to cover all these bearish positions, indicating there's plenty of buying power to give the stock a boost.

Options traders have also been unusually pessimistic. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), STX's 50-day put/call volume ratio of 0.77 sits higher than two-thirds of the past year's readings. The is echoed among the short-term crowd, per the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.42. Not only does this show that put open interest easily outweighs call open interest among options set to expire in the next three months, but it ranks in the 90th percentile of its 12-month range. An unwinding of these bearish positions could serve as a boon for STX stock.

Finally, as alluded to earlier, it's a prime time to pick up STX's short-term options on the cheap. For starters, the stock's Schaeffer's Volatility Index (SVI) of 32% ranks in the low 7th annual percentile, while its 30-day at-the-money implied volatility sits just 3 percentage points from a 12-month low, at 32.1%. Put plainly, very low volatility expectations are currently being priced into STX's near-term options. What's more, the security boasts a Schaeffer's Volatility Scorecard (SVS) of 100 -- the highest reading possible -- indicating that the options market has severely underpriced Seagate Technology PLC's (NASDAQ:STX) ability to make outsized moves on the charts over the last 12 months.

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