Call Options Traders Flock to Software Stock

Call open interest outweighs put open interest among near-term contracts

Managing Editor
Oct 2, 2018 at 1:04 PM
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Shares of Splunk Inc (NASDAQ:SPLK) are lower in afternoon trading, last seen down 1.8% at $115.41. The shares have now pulled back to within one standard deviation of a historically bullish moving average, and data from Schaeffer's Senior Quantitative Analyst Rocky White suggests that now may be the perfect time to bet on the software firm's next leg higher.

On the charts, Splunk stock has been climbing higher, despite a notable summer pullback. In fact, it remains up almost 40% year-to-date. Supporting its losses has been not only the $95 level, but also the stock's 40-day trendline.

After a lengthy stretch above it, the shares are now within one standard deviation of this moving average. There have been seven similar signals of this kind in the past three years, after which SPLK went on to average a one-month gain of 5.26%, with 86% of those returns positive, per White. Another surge of this magnitude would put the shares back near $121.48 by this time next month.

Daily Chart of SPLK with 40MA

In the options pits, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the stock with a 10-day call/put volume ratio of 3.46, ranking in the 79th annual percentile. This shows that during the past two weeks of trading, calls have been purchased over puts at a faster-than-usual pace.

Echoing this is the security's Schaeffer's put/call open interest ratio (SOIR) of 0.42, ranking in the 2nd percentile of its annual range. In other words, call open interest outweighs put open interest among contracts expiring within three months. What's more, during the past 10 days, the weekly 10/5 120- and 123-strike calls have seen the highest increase in open interest. 

Lastly, now seems to be an attractive time for near-term traders to hop onto SPLK with options. This is based on the security's Schaeffer's Volatility Index (SVI) of 36%, which sits in the low 27th annual percentile, indicating muted volatility expectations are being priced into short-term contracts. Plus, the security's Schaeffer's Volatility Scorecard (SVS) of 89 (out of 100) shows the software stock has tended to make larger-than-expected moves on the chart over the past year.

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