Popular Software Stock Could Keep Notching Record Highs

Software firm AppLovin (APP) will join the S&P 500 Index on September 22, replacing MarketAxess Holdings, a move that has already fueled an 11.5% rally and a new all-time high, extending its 538.8% year-over-year gain. This inclusion coincides with a historically bullish signal of low implied volatility, which has previously preceded significant one-month gains for the stock. While short interest and put buying have recently increased, an unwinding of these bearish bets could provide options-related tailwinds, especially as APP has historically outperformed volatility expectations.

Analysis

AppLovin's (APP) impending inclusion in the S&P 500 on September 22 has acted as a significant catalyst, driving the stock up 11.5% since the announcement and to a new all-time high of $576.44. This event builds on formidable momentum, with the stock having already achieved a 538.8% year-over-year gain, currently supported by its ascending 20-day moving average. A historically bullish technical signal is also in effect, where the stock's recent peak has occurred amid low implied volatility; its Schaeffer's Volatility Index (SVI) of 53% is in the 12th percentile of its annual range. This specific setup has historically preceded a one-month gain 77% of the time, with an average return of 12.1%. Contrasting this bullish outlook is a notable increase in bearish sentiment. Short interest has risen 13.7% over the last two reporting periods, now accounting for nearly 5% of the available float. Furthermore, options market data reveals a recent uptick in put buying, with the 10-day put/call ratio of 0.98 and the Schaeffer's put/call open interest ratio (SOIR) sitting in the 86th and 81st percentiles of their annual ranges, respectively. This buildup of bearish bets, however, could provide a source of fuel for further upside via a short squeeze if the positive momentum continues. The stock's high Schaeffer's Volatility Scorecard (SVS) of 87 indicates a historical tendency to exceed volatility expectations, a key consideration for options traders.

Key Decisions for Investors

• The mandatory buying from index funds tracking the S&P 500 provides a strong, near-term tailwind that could sustain the stock's current upward trajectory.
• Monitor the elevated short interest and put option positioning, as a continuation of positive price action could trigger an unwinding of these bearish bets, potentially accelerating the rally.
• Given the combination of historically low implied volatility and a high Volatility Scorecard (SVS of 87), consider bullish options strategies, as current pricing may underestimate the stock's potential for a significant upward move.