/code%20on%20computer%20screen%20java%20html.jpg)
A key benefit of Barchart’s unusual stock options volume screener is that it can provide clues – even for those not interested in options trading – regarding big price swings. At the same time, just assessing the headline print can be deceptive because of various nuances involved. Case in point is cybersecurity specialist SentinelOne (S), which recently announced that it was exploring alternatives regarding its future.
According to Barchart content partner The Motley Fool (TMF), Reuters published an exclusive report during the afternoon session on Monday, which revealed that one of the possible paths includes a sale of the cybersecurity enterprise. Further, the news agency stated that SentinelOne’s leadership team already hired an investment bank to advise it through the process. Plus, management already had spoken to a few private equity firms.
While Reuters mentioned that S stock benefited from a bonanza in technology spending during the COVID-19 pandemic, SentinelOne suffered a dramatic loss of market value over the past two years. Fundamentally, the prior positive catalysts evaporated as several companies slashed their information technology (IT) budgets due to economic headwinds. Thus, despite the underlying relevance of S stock, broader negative conditions ultimately won out.
On paper, then, SentinelOne exploring a possible sale should be good news for shareholders of S stock. Unfortunately, TMF argues otherwise, pointing to sources allegedly stating that the “potential takeover bids from outside parties aren't living up to management's hopes.”
Put another way, if this rumor is true, nobody wants to pony up for S stock. Notably, TMF highlighted SentinelOne’s price-to-sales ratio of 10X being incredibly cheap compared to rivals. Perhaps there’s a reason for that?
Looking at the options radar, retail investors may want to hold off for a bit.
The Options Market Presents a Tricky Narrative for S Stock
On the surface, taking the long position in S stock might seem like a no-brainer. As TMF pointed out, SentinelOne trades at an attractive revenue multiple. In addition, there’s the main catalyst of management facing reality, potentially throwing in the towel and giving recent stakeholders a chance of a quick positive return. Even the options print seems to corral investors to the bullish thesis.
Following the close of the Aug. 21 session, total options volume reached 49,659 contracts against an open interest reading of 170,246. Further, the delta between the Monday session volume and trailing one-month average metric came out to 492.66%.
Drilling down the transactional column, call volume hit 40,812 contracts while put volume came out to only 8,847. This pairing yielded a put/call volume ratio of 0.22, which taken by itself dramatically favors the bulls. Further, the put/call open interest ratio sits at 0.37, which is also low and thereby seemingly features optimistic intent.
However, looking at Fintel’s data for options flow – which filters for large block trades likely made by institutions – the ratio of bullishly oriented trades (i.e. bought calls, sold puts) against bearish trades (bought puts, sold calls) came out to 0.567X. In other words, bearish transactions outflanked their bullish peers by a factor of 1.76X.
That’s one reason to be hesitant about S stock: it just doesn’t seem that the smart money believes shares will go anywhere despite the sale exploration. However, an even more curious point comes down to some of the biggest block trades centering on sold calls with a strike price of $13 and an expiration date of Sept. 15, 2023.
On Monday, S stock closed at $16.82, which means that these sold calls are well in the money (ITM). While many possible explanations exist, some institutional investors may be taking this action as part of a protective or exit strategy.
To make a long story short, these alpha dog traders may want to get some premium now while ensuring divesture at an acceptable strike price. And if S stock falls below the strike price – even better for the traders selling the calls.
Either way, it’s not a confidence-inspiring move if you’re looking to buy S stock outright in the open market.
It May Be Best to Wait
Now, to be 100% clear, the above speculation is just one of myriad possibilities undergirding the unusual options activity of S stock. However, I mention it because it seems to pan out with other pieces of evidence.
Obviously, you have the concern related to SentinelOne’s chart performance. In other platforms, I’ve spoken positively about the company and its upside potential based on the underlying cybersecurity angle. Sadly, it just didn’t work out for S stock.
Next, you have the undervalued multiple, which few investors have picked up on (as evidenced by the red ink in the charts). More worryingly, rumors suggest that no one wants to bring an attractive buyout offer to the table.
With all that, it’s not surprising that institutional investors aren’t biting on S stock. Therefore, investors should think carefully before jumping into this trade.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
