Pent-Up Buying Power Could Boost Cadence Design Systems Stock

Short interest has nearly doubled since June

Jan 9, 2018 at 10:23 AM
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Chip software developer Cadence Design Systems Inc (NASDAQ:CDNS) has been rallying hard over the past 12 months, up over 71%. More recently, the stock pulled back to its rising 80-day moving average after topping out at a record high in late November. This trendline has had historically bullish implications, suggesting CDNS could be ready to embark on its next leg higher.


cdns daily chart jan 5


In spite of this strong technical showing, the security is surrounded by skeptics. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, the stock's 20-day put/call volume ratio recently spiked -- last seen at a top-heavy 1.92. A similar move in January 2017 turned out to be a buy signal for the shares going forward

Short sellers have been targeting the stock, too, with short interest nearly doubling since hitting a multi-year low in June. While CDNS' ability to rally in the face of such intense selling pressure speaks to its underlying strength, a capitulation from some of the weaker bearish hands could create tailwinds for the shares.

A round of well-deserved upgrades could help draw buyers to the table, as well. Of the seven analysts covering the shares, five maintain a "hold" or "strong sell" rating.

It's an ideal time to bet on CDNS with options, considering the stock's Schaeffer's Volatility Index (SVI) of 18% ranks in the 5th annual percentile -- indicating relatively muted volatility expectations are being priced into near-term contracts. Additionally, a lofty Schaeffer's Volatility Scorecard (SVS) reading of 97 suggests the security has tended to make outsized moves, compared to what the option market has expected.

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


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