It’s Friday, the end of another work week.
Americans of all stripes are talking about last night's debate. If you’re a Republican, you’re probably in a better mood today than Democrat supporters. Fortunately, I’m Canadian, so I don’t have a dog in this fight.
On the last day of every week I look at 2-3 unusually active options from the previous day’s trading. In Thursday’s trading, options volume was 38.6 million, about 2.8 million below the average daily volume. The put/call split was 40/60. The top 10 stocks represented 53% of the volume.
Many investors buy call options when they’re bullish about a stock. However, selling puts can also be effective at building a position in a stock you’re bullish about
Scanning yesterday’s action, I see two put options to sell that could generate income and possibly get you a better entry point.
Have an excellent weekendE.L.F. Beauty
If you’re unfamiliar with the fast-growing cosmetics company, the E.L.F. in E.L.F Beauty (ELF) stands for eyes, lips, face, an acronym that aptly describes what it does to make money.
Last June, almost to the day, I wrote about E.L.F., as part of my Barchart story about three Top 100 stocks to get onboard with.
“Founded in 2004 in Oakland, it went public in March 2017 at $27 a share. The IPO valued the company’s equity at $1.26 billion. Six years later -- thanks to a 319% increase in its share price over the past year -- it’s got a market cap of $5.9 billion, a nearly five-fold increase,” I wrote on June 21, 2023.
Today, its market cap is $12.2 billion, more than double a year ago. I concluded the article by saying, “It’s a comer.”
In May, E.L.F. reported its Q4 2024 and full-year results. In 2024, its sales were $1.02 billion, 77% higher than in 2023. Its adjusted EBITDA was $234.7 millon, 101% higher than a year ago with a 23% EBITDA margin.
In 2025, it expects sales of $1.24 billion at the midpoint of its May guidance, 21% higher than in 2024. Its adjusted EBITDA is expected to be $289 million, a 23% increase from last year.
ELF stock had a three-month dip between March and May. However, its shares are up 38% since announcing its results on May 22. They now sit dollars off an all-time high.
The two put options in question for E.L.F.
Both puts had double-digit Vol/OI ratios yesterday. While the $210 strike is a tempting sell -- its annualized return is 50% -- the stock possesses enough volatility that a 10% correction in the next seven weeks is more than possible.
For that reason, I like the $185 strike with an annualized return of 19%, and a net price paid should you have to buy the shares of $179.30, which is a much better entry point.
PayPal Holdings
PayPal Holdings (PYPL) is a work in progress.
CEO Alex Chriss has been in the top job at the payments company since September. Before that, he headed Intuit’s (INTU) Small Business and Self-Employed Group. His business segment was responsible for QuickBooks and Mailchimp.
As everyone and their dog knows, PYPL stock has struggled mightily for years, losing 49% of its value over the past five years. Chriss was hired to reignite growth and profits at the company.
The problem for investors is determining if PayPal is a value buy or a value trap. It currently has a P/S ratio of 2.05x, less than half MercadoLibre (MELI) at 5.88x. MELI is a Latin American peer.
Chriss has focused his attention on the company’s data, which he believes can be better leveraged to create new and lucrative revenue streams. One is Advanced Offers, which gives PayPal customers special deals and incentives from advertisers. Paypal makes money from processing payments on the customer side and advertising revenue from the merchants and brands on the other side.
With a combination of cost controls and new revenue, it plans to use all its near-term cash flow to repurchase its shares. That’s a no-brainer.
As recently as July 2021, PayPal traded over $300. I don’t think it’s getting back there anytime soon, but Chriss has provided long-time shareholders with some hope.
Here are the four unusually active put options from Thursday’s trading:
Two are out of the money and two are in the money. If you want to generate income, the $45 and $50 strikes are the ones to consider.
The annualized return of the Aug. 16 $50 put is 7.4%. Except for a brief period last October, it hasn’t traded below $50 in the past year. You might keep rolling over a $50 strike every seven weeks in the off chance there’s a correction in the next 6-12 months.
The annualized return for the June 18/2026 $45 strike is a mere 4%. With nearly two years to expiration, it’s too long a hold in my opinion. Besides, it hasn’t traded at $45 since April 2017.
Go with the former.
On the date of publication, Will Ashworth 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.
