Looking to Bet on a short-term rally?

09/20/2019 6:00 am EST

Focus: STOCKS

Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

It's been a wild September already for Coupa Software (COUP). There was an earnings-driven bull gap on Sept. 4, with COUP share volume hitting an annual high and the security rallying 8.7% on the day to register its biggest percentage gain in three months. But just a few trading days later, on Monday, Sept. 9, COUP was hit with heavy selling as cloud stocks paced a broader tech decline. The shares gave up 7.9% by the close, marking their worst performance in over five months and completely filling that bull gap in the process.

That sharp pullback in COUP earlier this month just triggered an intriguing buy signal, per historical data from Schaeffer's Senior Quantitative Analyst Rocky White. There have been four prior instances of the stock pulling back to test support at its 80-day moving average after a prolonged period above it, and the short-term results going forward have been predominantly bullish. One month after an 80-day pullback, COUP is trading higher 75% of the time, with the average return for this time frame arriving at 11.57%.

Based on the equity's current price, just below $137, another average rally from this trendline support would place the shares north of $152 a month from now— back in the neighborhood of their early September post-earnings high close.

A COUP bounce from here could catch bears off-guard. As of the most recent reporting period, short interest accounts for 15.4% of the stock's float, or 5.2x COUP's average daily trading volume. With the stock stubbornly holding above support at $126 — site of a 100% year-to-date return — since early July, a capitulation by some of these skeptics could fuel future gains.

For those looking to bet on a short-term rally for COUP, now is an ideal time to buy October-dated calls. The stock's Schaeffer's Volatility Index (SVI) stands at 47%, which arrives in the low 17th percentile of its annual range. In other words, near-dated at-the-money options on COUP have priced in lower volatility expectations only 17% of the time in the past year, allowing premium buyers to reap the maximum possible leverage on short-term price moves.

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