2 Under-the-Radar Gems for Contrarian Option Bulls

Underloved Verisign, Inc. (VRSN) and Paychex, Inc. (PAYX) could be set to keep rallying through March

Mar 2, 2017 at 12:05 PM
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As contrarians, we're always on the lookout for under-the-radar opportunities -- that is, stocks that have earned little upbeat attention from analysts and traders despite their strong technical performances. It's particularly appealing if we can identify such a setup on stocks offering options at discounted premiums. Along those lines, Schaeffer's Quantitative Analyst Chris Prybal identified internet stock Verisign, Inc. (NASDAQ:VRSN) and HR specialist Paychex, Inc. (NASDAQ:PAYX). Below, we'll take a closer look at why the shares of VRSN and PAYX could continue to rally, and why it's an attractive time for options traders to get in on the action.

Analysts, Short Sellers Betting Against Verisign

VRSN has been on the rise for more than six months, with the 30-day moving average helping to usher the shares higher since early January. In fact, the stock has already tacked on 10% year-to-date, at $83.71. The security could be in for more gains this month, too, as the shares have historically performed well in March, averaging a gain of 4.6% since inception, and positive 63% of the time.

Still, of the four analysts following VRSN, three maintain a "hold" opinion, while one calls it a "strong sell." A round of overdue upgrades could keep the stock moving higher. Short interest is also elevated, accounting for almost 16% of VRSN's total float, which would take two weeks to cover, at the stock's typical daily pace of trading -- plenty of buying power to boost the shares.

Options volume on Verisign, Inc. tends to run light on an absolute basis, but puts have been unusually popular among near-term traders. The stock's Schaeffer's put/call open interest ratio (SOIR) of 2.73 shows put open interest nearly tripling call open interest among options set to expire within three months. Plus, this ratio ranks in the top third of all readings from the past year. On a related note, now could be a good time for premium buyers to strike. With a Schaeffer's Volatility Index (SVI) of 18% -- just 3 percentage points from an annual low -- VRSN's short-term options are pricing in historically low volatility expectations.

Paychex Gets Little Love Despite Record Highs

On a long-term uptrend dating back to early 2009, shares of PAYX have added 19% over the past 12 months, at $62.41. In fact, after a bounce off support at the rising 50-week moving average, the stock hit a record high above $63 on Wednesday. The equity could keep its rally alive through March, too, considering its historical average gain of 2.5% for the month, and positive 64% of the time.

Analysts are betting against the shares, however, with 95% of covering firms doling out a rating of "hold" or worse. What's more, the average 12-month price target is seated underfoot, at $58.93, suggesting brokerage firms may soon raise their opinions, creating tailwinds for PAYX. Meanwhile, short interest represents more than five sessions' worth of purchasing power, based on the stock's average daily volume, suggesting the shares' rally could still have fuel in the tank.

On the flipside, amid relatively light volumes, PAYX options traders have been at call-heavy extremes of late. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has seen five calls bought to open for each put over the past 50 days -- a call/put volume ratio higher than all comparable readings from the past year. That said, some recent call buying could have come at the hands of short sellers looking for a hedge.

Either way, short-term options buyers could score a bargain right now. Paychex, Inc. has an SVI of 15% -- in the low 17th percentile of its annual range -- while its Schaeffer's Volatility Scorecard (SVS) of 86 indicates the stock has outperformed the options market's volatility expectations over the last 12 months.

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