Short covering could create even bigger tailwinds for the shares
Data storage concern Seagate Technology PLC (NASDAQ:STX) suffered a sharp earnings-related pullback in early May, which sent the stock back toward its 2017 highs. Since then, however, the tech name reclaimed its pre-earnings close, and is now back within striking distance of capturing a fresh two-year high. Despite gaining 37% year-to-date and easily outperforming the broader market, the security remains surrounded by pessimism – suggesting now could be an opportune time for contrarian bulls to strike.
Digging deeper, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.75 ranks in the 81st annual percentile. This elevated ranking shows that short-term options traders have rarely exhibited a greater preference for puts over calls in the last year. Further, STX’s front-month gamma-weighted SOIR sits at 1.50, pointing to possible options-related support for the shares in the near term.
A continued round of short covering could also spark bigger tailwinds for STX. Although short interest declined more than 15% during the most past two reporting periods, there are still 19.21 million shares sold short -- accounting for 7.2% of the stock's float, or about a week’s worth of pent-up buying demand.
STX could also enjoy some overdue analyst upgrades. Despite outperforming the stock market over the past year, the equity boasts just three "strong buy" recommendations, compared to 18 "hold" or worse analyst ratings.
Finally, Seagate Technology's Schaeffer’s Volatility Index (SVI) of 26% is in the bottom 6% of its annual range, indicating short-term options are pricing in relatively low volatility expectations. Further, our recommended call option sports a leverage ratio of 6.4, and will double in value on just a 15.1% rally in the shares.
Subscribers to Schaeffer's Weekend Trader Series options recommendation service received this STX 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.