2 Options Buying Ideas From This Underloved Sector

Analysts and options trader have taken different stances on United Technologies and Automatic Data Processing

Mar 22, 2017 at 3:28 PM
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Each week, Schaeffer's Senior Quantitative Analyst Rocky White compiles our internal Sector Scorecard to identify sectors with strong contrarian opportunities. Today we're digging down into the "Business Products/Services" sector, where the 18 components we track are seriously lacking love from the brokerage bunch. Specifically, these stocks have seen just 38% "buy" ratings, even with 15 of 18 components trading above their 80-day moving averages. Below, we'll take a look at two components that could be overdue for some analyst love -- Dow stock United Technologies Corporation (NYSE:UTX) and HR specialist Automatic Data Processing (NASDAQ:ADP).

Options Traders Still Optimistic Toward UTX Stock

UTX has been trending higher for more than a year, with the 50-day moving average containing an early February pullback. At $112.01, the shares are sitting just 10% shy of their 2015 record peak. Despite a respectable technical performance, however, more than half of tracking brokerage firms recommend holding or selling the stock. A round of upgrades could send UTX stock on another leg higher.

Stock and options traders don't seem to agree with analysts' skeptical outlook. Short interest represents less than 1% of UTX's total float, and options traders have purchased calls over puts at extreme rates of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) the stock's top-heavy 10-week call/put volume ratio of 2.78 ranks in the 93rd percentile of its annual range.

Regardless of whether it's calls or puts, though, options buyers could find a great deal on United Technologies Corporation's short-term options right now. UTX stock's Schaeffer's Volatility Index (SVI) of 13% is seated lower than 94% of the past year's readings, pointing to historically low volatility expectations being priced in.

ADP Shares Find Few Friends Among the Brokerage Bunch

Year-over-year, shares of ADP have tacked on 16.8% to trade at $103.41, with the $103 mark providing support throughout this month so far. In fact, the stock tapped an all-time high of $105.20 just last week, but analysts remain unconvinced. Out of 18 firms following the equity, 13 maintain a rating of "hold" or worse, leaving plenty of room for upgrades, which could be a boon for ADP.

Meanwhile, short interest on the stock is seated at its lowest level in more than six months, accounting for just over 1% of ADP's total float. Options traders have also been kind, though absolute volume tends to run light. At the ISE, CBOE, and PHLX, speculators have purchased 4.53 ADP calls for each put over the past two weeks -- a call/put volume ratio in the 91st annual percentile.

And like UTX, Automatic Data Processing seems to be presenting a prime opportunity for options buyers. With an SVI of 14% -- in the low 7th percentile of its 12-month range -- short-term options are unusually well-priced, from a historical volatility standpoint. What's more, a Schaeffer's Volatility Scorecard (SVS) of 95 suggests ADP stock has significantly outperformed the volatility expectations priced in over the past year.

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