Hewlett Packard Enterprises Co (HPE): A Case For Buying Call Options

Hewlett Packard Enterprises Co (HPE) could benefit as options traders and analysts rethink their bearish stance toward the outperforming stock

Dec 19, 2016 at 10:27 AM
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Hewlett Packard Enterprises Co (NYSE:HPE) has crushed the broader market in 2016. The tech stock has surged nearly 56% year-to-date at $23.68, and earlier this month reached a record high of $24.79. What's more, plenty of pessimism has been levied toward the shares, suggesting they're in a strong position to benefit from contrarian tailwinds.

On the options front, HPE put buyers have dominated in recent weeks. The stock's 10-day put/call volume ratio is 1.78 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- just 11 percentage points from an annual peak.

Underscoring the prevailing put bias is HPE's Schaeffer's put/call open interest ratio (SOIR), which sits at a 52-week high of 1.65. In other words, open interest among options in the front three-months' series hasn't been this put-skewed in the past year. What's more, put open interest across all series sits in the 99th percentile of its 12-month range, with more than 155,400 contracts in residence. While some puts may have been purchased by shareholders looking to protect paper profits against a surprise slide, a capitulation among "vanilla" bears could bolster buying power.

Now is an opportune time to purchase premium on short-term options, as well. The stock's Schaeffer's Volatility Index (SVI) of 24% sits below 98% of all readings from the last year. Meanwhile, earlier today, HPE's 30-day at-the-money implied volatility touched an annual low, suggesting front-month options are attractively priced right now, from a volatility perspective. If that's not enough, the stock's Schaeffer's Volatility Scorecard (SVS) of 77 suggests the shares have tended to make sharper moves over the last 12 months than the market has priced in to their options.

Another factor potentially working in the favor of Hewlett Packard Enterprises Co (NYSE:HPE) bulls is the prevailing skepticism seen among analysts. Despite the stock's technical strength, 13 of 22 brokerage firms have handed out a "hold" or worse opinion. Not to mention, HPE's consensus 12-month price target of $24.64 is well within striking distance. In other words, the shares could potentially benefit from a round of upgrades and/or price-target hikes.

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