SPLK was poised to bounce from a historically bullish trendline
Subscribers to Schaeffer's Weekly Options Trader service more than doubled their money in just two weeks with the Splunk Inc (NASDAQ:SPLK) weekly 4/12 116-strike call. Below, we will dive into why we anticipated a fast and aggressive upside move from the software stock, and how the options trade unfolded.
When we first recommended the call option on Thursday, March 28, SPLK had pulled back to its 80-day moving average, which, per historical data from Schaeffer's Senior Quantitative Analyst Rocky White, indicated the stock could be set for its next leg higher. The shares were also seeing support at the $119 level, which represented seven times the stock's 2012 initial public offering (IPO) price of $17.
Looking toward options, peak put open interest stood at the April 120 strike, while peak call open interest landed at the April 130 strike. If the software stock respected these peak open interest levels, it would seem the shares were trading at the bottom of the range, with significant room to run higher in the weeks ahead.
Lastly, the equity's Schaeffer's Volatility Index (SVI) stood in the low 14th percentile of its annual range at the time, meaning short-term volatility expectations were quite muted on SPLK. Plus, the security's Schaeffer's Volatility Scorecard (SVS) came in at 75 out of a possible 100, meaning the equity had tended to make outsized moves over the last year, compared to what the options market had priced in.
Splunk stock bounced sharply from its 80-day trendline following our late-March entry on the trade, adding roughly 10% by April 10, at which point we recommended taking profits on the first half of the position at just over 100%. The shares continued to climb from here, making their way to an intraday peak of $135.90 on April 12 -- when we closed the second half of the position ahead of expiration, allowing options traders to lock in a net profit of 155%.
