Options Traders Scored a Huge Profit On This Software Stock

Shorts were piling on NOW stock

Managing Editor
Oct 26, 2017 at 1:33 PM
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Subscribers to Schaeffer's Leverage Trader service recently scored a 119% profit from the October 109 ServiceNow Inc (NYSE:NOW) calls. Below, we'll break down why we were bullish on NOW and how the successful options trade unfolded. 

When we recommended the call on Sept. 27, NOW stock was in the midst of a modest pullback from what was then a record high of $118.62 on Sept. 7. Plus, the software stock was up over 50% year-to-date, and its 80-day moving average appeared ready to contain the pullback -- just as it had done on Aug. 11. The 80-day moving average also conveniently happened to be six times the stock's IPO price of $18.

Despite NOW's solid performance this year, short sellers were flocking to the equity. The 11.32 million shares sold short was the highest point in over four years, and represented a healthy 6% of the stock's total available float. It seemed a short squeeze was possible, which would provide tailwinds for the stock.

In the options pits, NOW's Schaeffer's put/call open interest ratio (SOIR) was docked at 3.28 -- more than doubling its ratio of 1.38 on Aug. 22. Digging deeper, there was peak put open interest at the 110 strike in the October and November series. This meant short-term options traders were fading the stock's price action, and had rarely been as put-heavy toward the equity as they were at that point. An unwinding of these bearish bets in the options pits could drive the stock even higher.

Furthermore, NOW stock had low volatility expectations priced into its near-term options. The October calls' implied volatility was docked at 26 -- a level that was low relative to that of the 52-week range.

The stock subsequently pushed higher, allowing us to close our position on Oct. 20, when NOW shot to a record high of $124.80. This allowed options traders to lock in a gain of 129% in less than a month.

Trade Postmortem NOW

 

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