With so many publicly traded enterprises competing for your attention, it’s difficult to pick out the most viable opportunities. To help in this endeavor, retail investors should consider daily perusing Barchart Screeners. These pre-made templates enable you to quickly filter market ideas based on certain criteria, such as meeting key price points or signaling specific technical indicators.
One screener that’s readily intuitive is called “Strong Volume Gains.” The stocks in this category have demonstrated strong volume gains from the prior session, along with positive price and volume momentum over the trailing month. In other words, we’re not just talking about an aberrant, one-off incident but rather a possible development of a wider trend.
The primary motive for assessing volume is to identify market interest and sentiment. Naturally, high trading volume strongly implies more eyeballs on highlighted opportunities, which can then signal robust price swings. In addition, volume trends provide additional context for any driving catalyst, such as earnings or some other significant news item.
What can really intrigue speculators are low-priced securities. While incredibly risky, “cheap” stocks can skyrocket under intense volume spikes. And that’s exactly what we’re seeing with Petco Health and Wellness (WOOF).
WOOF Stock Can’t Stop Flying
Easily one of the strongest companies in the equities market in the near-term picture, WOOF stock closed the May 30 session up 25.56% against the prior day. Volume hit 16.8 million shares, a phenomenal leap from the average trading volume of 7.82 million shares.
What’s more, WOOF stock is a freight train, with bears refusing to stand in its way. Over the trailing one-month period, the security gained 162% of equity value. Yet because of Petco’s extreme volatility, there could be additional room to run. It sounds strange to say but on a year-to-date basis, WOOF is up “only” 24.37%.
Technically speaking, the next logical target will be the $4 price target. On May 30, WOOF stock closed nominally at $3.93. Psychologically, humans prefer round numbers so if I had to guess, reaching $4 is a foregone conclusion. And that raises the prospect of speculating on WOOF call options.
To be sure, it’s an incredibly risky idea because of the relative lack of volume for Petco’s derivative contracts. Still, as an example, speculators can acquire Jun 21’24 4.00 Calls. While implied volatility (IV) is sky high for this contract at 105.4%, it’s still lower than the historical volatility (HV) of 127.55%. All other things being equal, there’s an incentive to buy this call rather than to sell it.
There are two other factors to keep in mind. First, the bid-ask spread as represented by the midpoint price comes out to 13.16%, which is steep compared to higher-volume derivatives. Second, the premium for this transaction on Thursday came out to $37 (37 cents multiplied by 100 shares controlled). That means WOOF stock would need to hit $4.37 in the open market for this call to break even based purely on intrinsic value.
Now, the speculation-based argument is that with so much robust sentiment, WOOF can easily reach this breakeven point prior to the June 21 expiration date, allowing the option to rise in value based on a combination of intrinsic and time value.
It’s a super-risky trade but it’s also an enticing one.
Catalysts for Petco Shares
So, the million-dollar question arrives: why is WOOF stock soaring? At this juncture, I believe there are two main catalysts.
First, WOOF stock appears to be the subject of a short squeeze. Currently, WOOF’s short interest as a percentage of float stands at 33.34%. Generally, short interest of 10% is quite elevated while anything over 20% is extremely so. At above 30%, you’re talking about significant bearish demand.
What may be helping to fuel “negative” speculation against Petco stock is the modest short borrow fee. According to Fintel, the latest fee comes out to only 0.28%. That’s quite low. It’s not unusual for short-squeeze targets to feature incredibly high short borrow fees due to the difficulty in securing enough shares for shorting activities.
To initiate a short position, a trader must first borrow the target security from a broker, then immediately sell them. The idea is to wait for the shares to lose value. If they do, the speculator can scoop the borrowed shares back up, return them to the broker and pocket the difference as profit. While it sounds simple in principle, the practice can get out of hand if the stock rises in value.
In that case, a panic might ensue as traders rush to cover their short positions. That of course involves buying to close, which then adds more upside pressure to the price.
The other catalyst for WOOF stock may be the fundamentals. Consistently, Americans have demonstrated that they not only love their four-legged family members but they’ll open their wallets for them – even under economic duress. In 2023, the U.S. pet industry reached $147 billion in total expenditures. What’s more, experts forecast solid year-over-year growth through 2030.
Tellingly, Petco beat analysts’ expectations for it most recent first-quarter earnings report. In a tricky environment for the consumer economy, the pet care market continues to shine bright. Frankly, it always has but the market is finally responding to it. As a result, WOOF stock is a risky but also rational wager.
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.
