Untapped Tech Stock for Option Bulls in the New Year

Why Fastly (FSLY) looks like a good pick for options bulls this month

Dec 23, 2020 at 12:23 PM
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The shares of IT service specialist Fastly Inc (NYSE:FSLY) are up over 400% year-to-date, and six time the initial public offering (IPO) price of $16. Additionally, the equity is standing above its $10 billion market cap, and above 50% retracement of 2020 highs and lows, with potential a gap-fill situation taking the stock to annual highs. Meanwhile, some mergers and acquisitions (M&A) rumors could put a floor on the stock, making now an opportune time to weigh in on FSLY.

FSLY Chart Dec 23

Analysts are skittish toward FSLY at the moment. Of the 11 in coverage, seven sport “hold” or worse ratings, while the remaining four call it a “buy” or better. There’s room for upgrades, however, as the equity’s 12-month consensus target price of $76.50 is a 25.6% discount to current levels.
 
Following a negative earning reaction in early November, short interest tripled from mid-October. In fact, short interest rose 17.4% in the last two reporting periods, and the 17.52 million shares sold short account for an incredible 15% of the stock’s available float. However, the shorts are now underwater and apt to cover amid the aforementioned M&A rumors.
 
Lastly, now looks to be the opportune time to enter Fastly stock with options. According to the security's Schaeffer's Volatility Index (SVI) of 78%, which sits in the 33rd percentile of all other annual readings, which means options traders are pricing in relatively low volatility expectations at the moment -- a boon for premium buyers. Plus, the equity's Schaeffer's Volatility Scorecard (SVS) sits up at 79 (out of 100), meaning the stock has greatly exceeded option traders' volatility expectations during the past year. Our recommended call has a leverage ratio of 4.0 and will double on a 27.7% rise in the underlying equity.

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