Software Stock's Pullback Looks Like a Buy Opportunity

The equity is ripe for analyst upgrades, too

Oct 28, 2020 at 11:19 AM

Software giant Zscaler Inc (NASDAQ:ZS) has far from struggled over the long term. From a technical view, the equity boasts a 214% year-to-date lead, and is now trading at more than nine times its initial public offering (IPO) price of $16. However, the shares have recently pulled back, making now an opportune time to buy calls.

ZS Oct 28

Meanwhile, shorts look to be in covering mode on the equity. Specifically, short interest fell 4.5% during the last two reporting periods, and now accounts for more than 10% of the stock’s total available float. Even further, there looks to be room for upgrades, with seven covering brokerages firms sporting a tepid "hold."

Turning toward options, this bearish sentiment is echoed. This is per ZS’ Schaeffer's put/call open interest ratio (SOIR) of 1.09, which stands higher 64% of readings from the past year. In other words, short-term option traders have rarely been more put-biased.

Lastly, now looks like an affordable time bet on Zscaler stock with options. This is per the stock's Schaeffer's Volatility Index (SVI) of 48%, which sits higher than just 10% of all other annual readings. What’s more, ZS’ Schaeffer's Volatility Scorecard (SVS) ranks at a high 78 out of 100, meaning the security has tended to exceed these expectations during the past year -- a boon for premium buyers. Our recommended call has a leverage ratio of 4.9 and will double in value on a 21.1% rise in the underlying equity.

Subscribers to Schaeffer's Weekend Trader options recommendation service received this ZS 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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