Investors seeking potential opportunities in the derivatives market should focus their attention on software enterprise ServiceNow (NOW). A cloud computing platform, ServiceNow focuses on the management of automated business workflows. With the rise of digitalization, its ability to automate the information technology process carries extraordinary relevance. Still, NOW stock appears relatively discounted.

Since the start of the year, NOW is down almost 3%. To be sure, the benchmark Nasdaq Composite index isn’t exactly having a bright moment either. However, it’s at least up over 1% during the same frame, suggesting that ServiceNow is a laggard. That said, momentum may be shifting. In the past five sessions, NOW stock gained over 2%, while in the trailing month, it’s up nearly 5%.

Recently, ServiceNow has also been attracting attention from derivative market traders. On Friday, total options volume for NOW stock reached 10,245 contracts, representing a 41.49% lift over the trailing one-month average volume. Further, call volume hit 6,250 contracts while put volume was 3,995, yielding a put/call ratio of 0.64.

At first glance, this lowly metric suggests that more people are trading calls than puts, which on paper appears bullish. However, a closer look at options flow — which focuses exclusively on big block transactions — revealed that on Friday, net trade sentiment slipped to $400,200 below parity, thus favoring the bears.

Stated differently, a large portion of the dollar volume was attributed to credit-based call options; essentially, traders were underwriting the risk that NOW stock would not rise to the profitability threshold prior to expiration. For most of the transactions, this threshold stands at around $1,058.50, which is less than 3% from where the equity trades today.

Despite this bearish signal, ServiceNow could present an intriguing opportunity.

Quantitative Signal Points to a Contrarian Trade in NOW Stock

Generally speaking, the options market represents the arena of the sophisticated investor. These folks tend to be professionals and thus enjoy access to resources and information that are simply not available to the average market participant. Subsequently, it’s important not to outright ignore unusual options activity.

At the same time, one shouldn’t assume that unusual options — or more precisely the interpretation of such — is foolproof. It’s not. In addition, it’s important to consider the nuances. As stated earlier, the biggest transactions based on dollar volume were for sold calls, which again are debit-based strategies. What we didn’t see too much of were debit-based transactions or bought puts. That would have indicated more direct pessimism.

More importantly, from a quantitative perspective, NOW stock appears rather compelling. Rather than attempting to find meaningful patterns in the total scale of price action, traders can compress share price data into binary sequences of accumulation and distribution. Through this process of discretization, we can impose stationarity in our data comparisons.

For instance, in the past two months, NOW stock printed a “6-4-U” market breadth sequence: six up weeks, four down weeks, with a net positive trajectory across the 10-week period. Notably, in 61.4% of cases, the following week’s price action results in upside, with a median return of 3.55%.

If the implications of the 6-4-U sequence pan out as projected, NOW stock could hit $1,066.78 in short order, perhaps in a week or two. Should the bulls maintain control of the market, it wouldn’t be out of the question for the security to rise above $1,072.

An Aggressive But Rational Trade

For those taking a quantitative approach to the market, the 1,050/1,060 bull call spread expiring June 20 may arguably offer the best balance between aggressiveness and rationality. This transaction involves buying the $1,050 call and simultaneously selling the $1,060 call, for a net debit paid of $530. Should NOW stock rise through the short strike price at expiration, the maximum reward is $470, a payout of nearly 89%.

Given the above statistical framework, NOW should have more than enough fuel to trigger the second leg of the aforementioned call spread. In addition, what makes this strategy attractive is that, as a baseline, the chance that a long position would be profitable in NOW is 56.25%. That’s already a solid upward bias. With the empirical response to the 6-4-U sequence, the bullish speculator essentially receives more than 5 percentage points of free odds.

A possible bonus is that, because the smart money sold calls that become profitable on the debit side at under $1,060, upward pressure may materialize due to forced assignment. It’s not a guarantee, of course, but it’s something to think about.