Short-Covering Tailwinds May Send Discovery Stock Soaring

Options traders have been quite bearish in recent weeks

by Emma Duncan

Published on Oct 10, 2018 at 2:05 PM

Shares of Discovery, Inc. (NASDAQ:DISCA) are up 1.2% at $32.74 in afternoon trading, the stock still buzzing on its morning upgrade at Credit Suisse to "outperform" from "neutral," and price-target hike to $40 from $30. Below, we will take a look at how DISCA has been faring on the charts long term, and see why now may be an attractive time to jump onto Discovery stock with options.

As we suspected, DISCA has been climbing higher on the charts since late 2017. In early June through mid-September, the security also benefited from the rising 60-day moving average. Also guiding the shares higher during this period was the $25-$26 floor of support, which the broadcasting stock managed to bounce off of on Sept. 11. The stock recently touched a three-year high of $34.06 on Oct. 5, and is now up 45.4% year-to-date.

Daily Chart of DISCA with 60MA and Highlight

Digging deeper, data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows Discovery stock with a 10-day put/call volume ratio of 8.05, ranking just one percentage point from an annual high. This lofty ranking suggests puts have been purchased over calls at a much faster-than-usual clip during the past two weeks. 

What's more, short interest has fallen nearly 5% during the most recent reporting period, with 29.81 million shares still held by short sellers. Accounting for nearly 6.7% of DISCA's total available float, it would take shorts six days to cover their bearish bets -- meaning short-covering tailwinds may push the security even higher.

Lastly, short-term options are attractively priced right now, from a volatility perspective. This is according to the security's Schaeffer's Volatility Index (SVI) of 34%, which sits in the 19th percentile of its annual range. In other words, muted volatility expectations are being priced into short-term contracts.

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