Beware the Western Digital Pop

WDC stock is running into a formidable moving average

by Andrea Kramer

Published on Jan 9, 2019 at 1:39 PM

The shares of Western Digital Corp (NASDAQ:WDC) are higher today, after the data storage concern launched a slate of new products at the Consumer Electronics Show (CES). Against this backdrop, WDC options volume is also soaring today. However, WDC stock is now facing off against a formidable trendline, and previous tests of the moving average have been "sell" signals for the shares.

Specifically, Western Digital stock was last seen 6.1% higher to trade at $40.45. The equity is now up about 20% since its Dec. 26 six-year low of $33.83, but today's upside momentum has stalled in the face of its 30-day moving average.

In the past two years, there have been four other times where WDC came within one standard deviation of its 30-day trendline, after a lengthy stretch below it. After those signals, the shares were lower at every single checkpoint, looking one, two, three, and four weeks out. In fact, WDC averaged a one-month loss of 17.13% after previous run-ups to this moving average. From the security's current perch, a similar drop would have the tech stock around $33.52 -- back in new-low territory.

WDC stock chart jan 9

As alluded to earlier, WDC options are active today. About 19,000 calls and 17,000 puts have traded thus far -- three times the average afternoon pace, and set for the 99th percentile of its annual range. Short-term, near-the-money calls are most popular, with new positions being established at the January 2019 41-strike call and February 40 call. "Vanilla" buyers of the calls expect WDC stock to extend its journey north of the strikes through the options' respective lifetimes.

That echoes the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.52, which indicates that calls nearly double puts among options slated to expire within three months. In fact, WDC's SOIR sits in just the second percentile of its annual range, implying that near-term option traders have rarely been more call-biased during the past year. Should Western Digital stock once again back down from trendline resistance, an unwinding of optimism in the options arena could weigh on the equity.

In any event, traders looking to speculate on WDC's short-term price action should consider options. The equity's Schaeffer's Volatility Scorecard (SVS) sits at a lofty 92 out of a possible 100, meaning the stock has handily exceeded options traders' volatility expectations in the past year -- a boon for would-be premium buyers.

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