Timing is everything (sometimes)

On Wednesday, Pure Storage (PSTG) opened around 18% lower after beating its earnings numbers but offering softer-than-expected guidance on Tuesday afternoon:¹

But as the chart shows, by midday the stock had rallied more than 6% off its intraday low ($31), which was as low as the stock had been since May 31.

Meanwhile, PSTG was also on top of the LiveAction scan for unusual call volume, with roughly 26 times the average number of contracts changing hands:

In other words, what probably looked like a very bearish picture in early trading—a stock falling more than 18% to its lowest level in six months—may have looked much different to some traders a couple of hours later. Shares had cut their intraday loss nearly in half and it looked like traders may have been scooping up calls. Queue the short squeeze?

Perhaps. But there are a few reasons experienced traders may have hesitated to embrace the idea that the stock was setting up for an immediate rebound. First, although calls were more active, puts were getting plenty of attention, too—volume was more than 11 times average. Second, most of the call trading occurred in out-of-the-money (OTM) December strike prices and, in most cases, these options had open interest (OI) that was higher than the day’s volume:

That means traders could have been getting out of existing positions rather than opening new ones, which could weaken the argument that the heavy call volume indicated renewed bullish sentiment. (If today’s OI is higher, it means traders were getting into the market. If it’s lower, it means they were getting out.)

Finally, the stock’s price history had an interesting story to tell. After other days like Wednesday, PSTG often fell more before rebounding (in those cases when it did bounce back).² Since 2015, the stock closed lower both of the next two trading days more than half the time. After five trading days, though, PSTG was higher more often than it was down, with an average gain of 1.3%, more than three times its overall five-day return of 0.4%.

In other words, if PTSG follows a similar path this time around, traders who saw Wednesday’s sell-off as a potential buying opportunity could experience more downside volatility even if they turn out to be correct in the longer term.

Today’s numbers include (all times ET): PMI Manufacturing (9:45 a.m.), ISM Manufacturing Index (10 a.m.), Construction Spending (10 a.m.), Jerome Powell speaks at Spelman College “Fireside Chat” (11 a.m.).

Today’s earnings include: Bank of Montreal (BMO).

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¹ StreetInsider.com. Pure Storage, Inc. (PSTG) Tops Q3 EPS by 10c, Guidance Misses Consensus. 11/29/23.
² All figures represent PSTG daily price data, 10/16/15–11/30/23. “Days like Wednesday” refers to a day the stock fell at least 5% intraday and hit its lowest low in at least two weeks, but rallied intraday to close in the upper half of the day’s range. Supporting document available upon request.