How Traders Just Scored On This Tech Stock's Impressive Rally

An unwinding of short interest and a note from Credit Suisse helped boost ZS shares

by Lillian Currens

Published on May 23, 2019 at 2:32 PM

Subscribers to Schaeffer's Weekend Trader Alert newsletter just doubled their money with our Zscaler (ZS) August 60 call option recommendation. Below, we'll explain how this options trade hit its 100% target during a period of time where the tech stock rose just under 30% on the charts.   

When we initially recommended the call in an early March email to subscribers, Zscaler stock had risen almost 51% year-to-date, thanks to an impressive post-earnings bull gap. We also made a strong contrarian case for more upside for the stock, as sentiment data surrounding ZS did not seem properly aligned on this outperformer. 

What stood out the most about the stock, however, is that most analysts were bearish at the time of our recommendation. By the numbers, seven of the 11 brokerage firms in coverage had a “hold” or “sell” rating. Coming off a well-received earnings release, it wouldn’t have been surprising to see bull notes come through in the near term, bringing more buyers to the table. 

We also took into account that short interest made up 12.5% of the equity's float, or over a week of trading at ZS's average daily volume, in early March. This elevated reading led us to expect some short-covering tailwinds for Zscaler a short time after our recommendation

Making this trade even more attractive was the Schaeffer’s Volatility Index (SVI) of 44%, a gauge of near-term volatility expectations that ranked in the bottom percentile of its annual range, telling us it could be a good time to buy premium.

Plus, short seller's tight grip began to loosen on the stock, with short interest dropping 7.3% in the last two reporting periods, likely providing some tailwinds on the charts, allowing subscribers to to achieve 100% profits on their ZS August 60 calls on Thursday, May 16 -- less than five weeks from our initial recommendation. 

ZS May 23

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