2 Software Stocks Poised for a September Surge

ATVI notched a new record high today, while RHT hit its loftiest mark since February 2000

by Patrick Martin

Published on Aug 31, 2017 at 3:33 PM

U.S. stocks are about to close out August with a win, but are heading into the weakest trading month of the year. Nevertheless, not all news is bad news, with video game maker Activision Blizzard, Inc. (NASDAQ:ATVI) and cloud name Red Hat Inc (NYSE:RHT) on the list of the best stocks to own in the month of September. Below, we will outline how shares of ATVI and RHT have historically performed in the upcoming month, and why it's a prime time for bullish options traders to strike on these two software stocks. 

Press Play On Activision Blizzard Stock

At last check, Activision Blizzard stock was down 0.3% to trade at $65.49, but hit a record high of $66.58 earlier. Longer term, the shares have tacked on 81% year-to-date, with pullbacks contained by the stock's 10-week moving average.

This trend of higher highs could continue, if history is any guide. According to data from Schaeffer's Quantitative Analyst Chris Prybal, ATVI stock has averaged a 4.2% gain over the past 23 Septembers, ending the month in positive territory 65% of the time.

In the options pits, traders have preferred long puts relative to calls at an unusual clip lately. This is evidenced by ATVI's 10-day put/call volume ratio of 1.05 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- in the 87th percentile of its annual range. Should the security continue to set records, it could lead to an unwinding of these bearish bets.

The good news for options traders is that it's a prime time to buy premium on the stock's short-term options. ATVI's Schaeffer's Volatility Index (SVI) of 25% ranks higher than just 15% of all other readings from the past year. In addition, Activision Blizzard sports a Schaeffer's Volatility Scorecard (SVS) of 92, which indicates the stock has exceeded options traders' volatility expectations during the past year.

Red Hat Stock Could Take Aim at Tech Bubble Levels

Red Hat stock is currently up 1.2% to trade at $107.44, fresh off a new 17-year high of $107.54. Much like Activision, RHT stock  is having a stellar year, up 54% so far, with its 60-day moving average serving as a springboard in May and June.

If past is precedent, RHT stock could continue this positive price action next month. According to Prybal's data, RHT stock has averaged a 4.24% gain in September over the past 18 years, with a 50% win rate. 

The stock could also get a boost should some of the weaker bearish hands capitulate to this upward momentum. Data from the ISE, CBOE, and PHLX shows RHT with a 50-day put/call volume ratio of 0.88, which ranks 1 percentage point from a 52-week high. In other words, options traders have been buying to open puts relative to calls at a near-annual-high clip.

Furthermore, it's an attractive time to buy premium on short-term RHT options. The security's SVI of 21%, which ranks in the 20th percentile of its annual range.
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