Scoop This Software Stock Up Now

Short-term call options are cheap right now

Feb 21, 2018 at 12:03 PM
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Tech stocks have been on fire this week, surging in part by Qualcomm's (QCOM) boosted buyout bid for NXP Semiconductors (NXPI). One name benefiting from sector tailwinds is Zendesk, Inc. (NYSE:ZEN), with shares of the software developer up 1.9% week-to-date to trade at $43.35, fresh off yesterday's record high of $43.65. If past is precedent, ZEN stock could be headed even higher -- and it looks to be a prime time to buy calls to bet on the equity.

Specifically, the equity's Schaeffer's Volatility Index (SVI) of 35% ranks in the 9th annual percentile, indicating low volatility expectations are being priced into short-term options. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been three other times since 2008 that ZEN stock has had muted front-month implied volatilities while trading within 2% of an annual high -- resulting in an average 21-day gain of 3.56%.

Based on the stock's current perch, another move of this magnitude would put it near $44.90 for the first time ever. As indicated above, this would just be more of the same for a security that's surged 54.8% year-over-year, and is pacing for back-to-back months of double-digit percentage gains.

A continued round of short covering could create even bigger tailwinds for ZEN shares. Though short interest has nearly halved since its mid-October peak, 3.33 million shares are still sold short -- nearly four days' worth of pent-up buying demand, at the average pace of trading.

Plus, Zendesk stock seems overdue for a round of price-target hikes, which could draw more buyers to the table. The average 12-month price target of $44.47 stands at a slim 2.7% premium to the equity's current perch.



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