Call Buyers Won Big as Seagate Technology Shorts Scrambled

STX shares found support just above their 2017 high

Subscribers to Schaeffer's Weekend Trader Alert service recently scored a 101% profit with Seagate Technology PLC (NASDAQ:STX) June 48-strike call. We're going to take a look back to see why we were initially bullish on STX when we recommended the call, and how the options trade unfolded.

We entered our bullish STX position on Tuesday, Jan. 16, allowing options traders to double their money less than two months into the trade. At the time of the recommendation, the data storage specialist had surged since its August lows, adding 68% and topping out at a two-year high around the $46 level in the first week of January. This level was just above the stock's 2017 high, and we expected STX to find support here going forward.

Despite the stock's technical strength, bullish analysts were few and far between. Just three of 21 analysts maintained a "strong buy" recommendation, indicating a round of upgrades from the stingy brokerage bunch would help keep the wind at STX's back.

At this time, short sellers were just beginning to head for the hills. Short interest was down 13.3% from the Sept. 1 reporting period, but the 39.13 million STX shares still dedicated to short interest represented 13.6% of the equity's available float, or nearly three weeks' worth of pent-up buying demand, at STX's average pace of trading. We anticipated an ongoing short squeeze would push the stock higher in the short term.

Lastly, Seagate Technology's options were attractively priced. STX's Schaeffer's Volatility Index (SVI) of 31% ranked in the 28th annual percentile, suggesting low volatility expectations were being priced into short-term contracts.

As expected, Seagate Technology stock continued to climb in the days after we entered the call trade. The stock pulled back in early February, but quickly bounced off the key 40-day moving average -- a proven buy signal -- and vaulted higher.

Predictably, short sellers scrambled to cover their losing bets in the face of STX's extended rally. Since our initial recommendation, short interest on the stock has dropped by more than 27%, which no doubt contributed to the strong upside momentum in STX of late.

While analysts still remain largely on the sidelines -- suggesting upgrades are a possibility going forward -- this strong technical performance and resulting capitulation by the shorts was sufficient to achieve our target profit earlier this week. We closed the STX call position on March 12, allowing traders to lock in a 101% profit.