A post-earnings pop plus overdue bull notes fueled the winning trade
A new year is upon us, but even though we finally put 2020 out of its misery, we wanted to pat ourselves on the back for a second and highlight our best options trades from the past year. Below is the first of three postmortems we'll unpack this week, on stocks that saw options traders score gains of over 400% in the span of just a few months.
Subscribers to Schaeffer's Event Trader service scored a 434% profit with the Zscaler Inc (NASDAQ:ZS) July 75 call we recommended. We'll take a closer look at why ZS appeared on our bullish radar, and how the winning options trade unfolded.
We recommended the ZS trade on May 18. At that time, the cloud-based security stock was up 62% year-to-date, but sentiment remained neutral at best and pessimistic in some areas, making it ripe for a contrarian trade.
More specifically, exactly half of the brokerages in coverage doled out "hold" or worse ratings on ZS. Plus, the 12-month consensus price target of $69 stood well below its current share price. In other words, ZS was ripe for a shift in analyst attention in the form of upgrades and/or price-target hikes. There was similar sentiment among short sellers, with over 14% of the stock's total available float sold short. This left plenty of room for a short squeeze, which would keep the wind at the equity's back.
Plus, short-term speculators were more put-heavy than usual, per the equity's top-heavy Schaeffer's put/call ratio (SOIR) of 1.18, in the 93rd annual percentile. An unwinding of the hedges related to these near-term bets could translate into options-related support for a stock.
The sweetener was that short-term options premiums on Zscaler stock looked relatively cheap, based on the equity's Schaeffer’s Volatility Index (SVI) that ranked in the low 36th percentile of its annual range. This was notable, considering the software company's earnings report and conference was two weeks away at that time, and volatility leading up to events tends to spike.
After our call recommendation, Zscaler stock roared higher with a post-earnings pop of 29.4% on May 29. Right on cue, analysts rushed to adjust their ratings, and the news drove ZS even higher. We closed half our position on Monday, June 1, when ZS was trading around $110. We closed the final half of the position on Thursday, July 9, with the stock around $127, allowing our subscribers to lock in a 434% profit in less than two months.
