On the surface, cloud computing platform specialist ServiceNow (NOW) appears disastrous. Once one of the bright names in tech, NOW stock has given up almost 21% of value over the past 52 weeks. Since the start of this year, the security has fallen nearly 19%. Not surprisingly, the Barchart Technical Opinion indicator rates shares as an 80% Strong Sell.
Looking at the Top Trade Alerts, the last signal flashed around mid-November, which of course was a Sell. And because this alert is based off moving average crossovers, it may take a while for NOW stock to see a Buy rating. However, for the most aggressive speculator, there’s a chance to extract some profits prior to the rest of the market catching on.
Basically, the hypothesis is as follows: for NOW stock to generate a technical Buy signal, you would probably have to wait for the security to breach $140. That’s about a 13% gap from the current spot price, which is a sizable jump when you factor in the leverage of options.
What’s more, the smart money seems to be finally believing in ServiceNow stock. In particular, options flow — a screener that focuses exclusively on big block transactions likely placed by institutional investors — revealed net trade sentiment of $7.07 million on last Friday’s session. Total gross bullish volume reached nearly $13.1 million, reflecting potentially rising optimism.
However, the real intrigue comes from microstructure analytics, specifically volatility skew and gamma exposure.
Understanding Smart Money and Dealer Positioning for NOW Stock
Let’s begin with volatility skew, which by definition is a screener that identifies implied volatility (IV) — or a stock’s potential range of motion — across the entire price spectrum of a given options chain. Basically, the skew showcases the surface-area distortion of volatility space, allowing retail traders to better understand how the smart money is positioning its risk profile.
If we frame the skew as a security protocol, the spikes in curvature reflect the potential vulnerability points where sophisticated market participants seek coverage; that is, they’re willing to pay an extra premium to avoid being directionally caught out.
In the case of NOW stock, for the May 15 expiration date, put IV is relatively elevated at the boundaries. This setup reflects a net prioritization toward downside tail risk protection, as well as a synthetic short on the deep in-the-money (ITM) put side, potentially to protect actual long exposure to NOW.
To be fair, the elevation is controlled so there’s no panic hedging going on. But what’s really telling is the lack of upside convexity; traders are not showing much interest in speculating on a bullish spike. Potentially, this could mean that call options may be relatively cheap on a volatility basis.
Another microstructure to consider is gamma exposure. This statistic measures the change in delta exposure for options based on changes in the underlying price. Ultimately, this activity covers the continuous hedging dealers perform to keep their option books delta-neutral.
Interestingly, when looking at the May 15 expiration date for NOW stock, gamma flip occurs around $114.30, while gamma clustering hits a maximum peak between $125 and $135. Around the tail end of this range is possible, where technical resistance may show up, as the gamma positioning would require dealers to sell NOW to keep their books balanced.
If you are the speculating type, there’s a sizable window here to possibly exploit before the well runs dry.
Sizing Up the Trade
Before placing the trade, we can refer to the Expected Move calculator to make sure that our trading targets fall within the realm of rationality. Hinging largely on IV readings, the calculator estimates that for the May 15 expiration date, NOW stock should land between $103.97 and $144.71. So, in theory, we could potentially push our trade to nearly $145 and still be rational.
However, because the volatility skew revealed that the priority is not to position for upside convexity, call options should be relatively discounted. As it turns out, we can buy the 130/135 bull call spread expiring May 15 for a total net debit of $230 (which is the most that can be lost in the trade).
Should NOW stock rise through the $135 strike at expiration, the maximum profit would be $270, a respectable payout of over 117%. Also, the second-leg strike offers a 6.7% cushion to the upper dispersion of the Expected Move calculator, which helps enhance the trade’s probabilistic credibility.
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.
