Unwinding Pessimism Could Boost Software Stock

The security looks ripe for bull notes, too

Dec 14, 2023 at 2:37 PM

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

Software stock UiPath Inc (NYSE:PATH) broke out from a weekly base pattern last week, finding a low on Thursday near its summer 2022 highs. PATH’s price is now moving back into its March 2022 post-earnings bear gap, and could fill the drawdown in the coming months amid an unwinding of pessimism.

Shorts began covering this fall, but are accelerating now into the end of the year. Short interest fell 11% over the last two weeks, yet the 37.52 million shares sold short still accounts for a healthy 8.4% of the stock’s total available float. What’s more, 13 of 22 covering analysts still rate UiPath stock a tepid “hold,” showing hesitancy even after a big post-earnings double beat earlier this month. These brokerages lagging behind could be forced to upgrade and raise their price targets, giving PATH a short-term boost.

An unwinding of options traders’ pessimism could also bode well for the equity, per its Schaeffer’s put/call open interest ratio (SOIR) that ranks higher than 96% of annual readings. Further, the equity’s 50-day put/call volume ratio at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands in the 74th percentile of readings from the past 12 months, underscoring the recent uptick in bearish sentiment.

Options traders are in luck, as PATH sports a Schaeffer’s Volatility Index (SVI) of 50%, which ranks in the 13th percentile of its annual range. This means options traders are pricing in very low volatility expectations at the moment. Our recommended February call has a leverage ratio of 5.3, and will double on an 18.7% pop in the underlying shares.

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