Recent correction in OKTA has put it in position for a strong breakout, reports Elizabeth Harrow.

Cloud software specialist Okta Inc. (OKTA) has been a standout performer on the charts in 2019, with the stock up 90.9% on a year-to-date basis. This impressive rally has been underlined by support at the equity's benchmark 50-day moving average, which — along with its 80-day counterpart — cushioned the March lows (see chart).

OKTA

OKTA's latest surge was sparked by its late-May earnings report, which propelled the shares to a gain of 25% in just 15 trading days post-event, capped off by the June 20 closing high of $133.38. Since then, however, the stock has pulled back to a historically significant short-term trendline that suggests the time is right to bet on outperforming OKTA's next leg higher.

Specifically, the tech stock settled Tuesday's trading just above its 30-day moving average. There have been six similar pullbacks by OKTA to its 30-day over the past three years, according to Schaeffer's Senior Quantitative Analyst Rocky White, and the short-term returns going forward have been eye-opening. Looking out five days after a signal, the stock's average return is 7.50%, with 100% positive returns. What's more, 10 days after a signal, OKTA boasts an average return of 10.88%, with 83% positive returns.

We covered this same 30-day buy signal for OKTA back on May 24, and — given the pre-earnings timing — the equity's performance afterward didn't disappoint. From its close at $107.98 on May 23, the stock went on to jump 17.9% over the next 10 trading days.

What makes this signal particularly compelling this time around is the fact that OKTA's short-term implied volatility levels have dropped considerably post-earnings, which means it's quite a bit cheaper to bet on the stock's rally via call options than it was a month ago. Schaeffer's Volatility Index (SVI), a measure of front-month, at-the-money implied volatility, checks in at 47%, which ranks in the low 8th percentile of its annual range. In other words, front-month OKTA options have been cheaper, from a volatility perspective, only 8% of the time in the last year.

Plus, the sentiment backdrop points to strong support for a rally. Short interest accounts for a steep 10.6% of OKTA's float, or 4.3 times the equity's average daily trading volume. A bounce from trendline support could spark a fresh wave of short-covering activity as bears scramble to cover their losing bets.

Currently, with OKTA poised to rally from a historically reliable moving average, and with implied volatility hovering near annual lows, White estimates an expected 10-day call option return of around 155%. This means now is an ideal time to bet on the next leg of the OKTA uptrend by purchasing call option premium.

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