Pent-Up Pessimism Could Ignite Hewlett Packard Enterprise Stock

Hewlett Packard Enterprise Co (HPE) looks like a solid contrarian trade idea for bulls

Feb 7, 2017 at 1:28 PM
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Enterprise technology firm Hewlett Packard Enterprise Co (NYSE:HPE) spun off from PC specialist HP Inc (NYSE:HPQ) in late 2015, and has been trekking up the charts ever since. Year-over-year, the former stock has muscled 70% higher, outdistancing the broader market. But you wouldn't know it based on Wall Street sentiment.

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Starting with the brokerage bunch, 13 of 22 analysts rate HPE a "hold" or "strong sell." This leaves plenty of room for upgrades to stoke the stock's fire.

Meanwhile, options traders have been very bearish, buying to open 9.42 puts for every call during the last two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- in the put-skewed 96th annual percentile. Echoing this, HPE's Schaeffer's put/call open interest ratio (SOIR) is a top-heavy 2.50, just 4 percentage points from a 12-month peak. From a contrarian perspective, an unwinding of these bearish put positions -- especially at strikes immediately underfoot -- could translate into support.

It's a good time to purchase premium on short-term HPE options. The stock's Schaeffer's Volatility Scorecard (SVS) is 78, suggesting the market has underestimated the shares' ability to make big moves over the past year. Plus, the equity's Schaeffer's Volatility Index (SVI) of 27% sits below 88% of all readings from the previous 52 weeks, hinting at modest near-term volatility expectations.

Last but not least, our recommended call option has a leverage ratio of roughly 7.0, meaning it will double in value on a 13% gain in the underlying shares.

Subscribers to Schaeffer's Weekend Series service received this HPE commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Series is one of our most popular trading services.
 

 

 

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