Thank God it's Friday.
As I usually do for my Friday installment at Barchart.com, I write about three different options contracts that were unusually active the day before. I'm always looking for something to hang my hat on.
I scanned the hundreds of call and put options that were unusually active yesterday, but nothing grabbed my fancy. So, I played around with a few different ideas.
And then, I came across an exciting income opportunity. That got me thinking about other potential income plays. I had found my theme for the day.
Here are three companies from three sectors whose put options generate significant income and could be long-term winners.
The Move to Electric
My leadoff selection is General Motors (GM).
It had two that were unusually active yesterday. The first was the Dec. 15 $29 put, while the second put was the Aug. 18 $32. Both strike prices exceeded GM’s closing share price of $33.12.
So, before we get into why I like GM, let’s consider the income potential of both puts.
The former had 218 days to expiration (DTE), a volume-to-open-interest (Vol/OI) ratio of 21.21, and a bid price of $2.01. That’s an annualized return of 10.1%. The latter had 98 days to expiration, a Vol/OI ratio of 4.19, and a bid price of $1.90. That’s an annualized return of 21.2%.
You're probably drooling at both if you're an income investor. However, selling puts is not just about income; you have to want to own the stock in case you’re forced to buy it at expiration.
So, if I’m choosing between the two, and income is a factor, I would go with the lower net price paid, which is $26.99, and the $29 strike. The downside of this play is that the DTE is 2.2x longer, giving the stock more time to go on a losing streak below $26.99. The good news is that GM stock hasn’t traded below $26.99 since August 2020.
Why would I buy GM stock?
Barron’s reported comments from Morgan Stanley analyst Adam Jonas in early May. Jonas suggested that GM’s profit questions related to its transition to electric vehicles are already priced into the stock.
He’s got a Buy rating on its stock with a $38 target price. According to Barchart.com data, analysts have a Moderate Buy (3.75 out of 5) on GM stock with a mean target of $49.12.
The PDF Champion
Next up is Adobe (ADBE), the company best known for giving us the PDF. Its digital solutions are used by content creators worldwide.
It, too, had two unusually active options on Thursday.
The first is the Jul. 21 $325 put with a DTE of 70, a Vol/OI ratio of 2.01, and a bid price of $11.75. That’s an annualized return of 17.7%. The second is the May 19 $340 put with a DTE of 7, a Vol/OI ratio of 1.33, and a bid price of $4.55. That’s an annualized return of 68.8%.
I almost had a heart attack when I saw that. But, of course, there’s a big-time catch: You’re buying ADBE stock at a net price of $337.03. It's traded at or below that level on many occasions since its significant fall in September 2022. Meanwhile, the $325 strike gives you a little more breathing room at a net price of $313.25. However, if you want to own the stock, given the time left, you probably won’t get the opportunity in this scenario.
Adobe presents an attractive valuation with a price-to-sales ratio of 8.9x, the lowest multiple since last September’s big dip and 2016 before that. It’s too good a business to stay down for long.
The Riskiest of the 3
The final put option to consider selling is also the riskiest. I’m talking about Upstart Holdings (UPST), the lending platform that gained traction in 2021 because of its use of artificial intelligence to help its banking partners find reasonable lending risks.
UPST stock is down nearly 50% over the past year as higher interest rates hurt the mortgage demand. Without demand, its banking partners have less use for its AI services.
However, its business appears to be getting better. The company reported encouraging results on Wednesday. In addition, Upstart noted in its conference call with analysts that it had obtained $2 billion in third-party funding for its higher-interest, short-duration personal loans.
As a result, its stock jumped more than 35%, prompting several analysts to increase their price targets. According to Barchart.com data, it has a mean target price of $14.68 with a Moderate Sell rating (1.93 out of 5).
As I said, it's the riskiest of the three. Govern yourself accordingly.
As for the put in question, there were several, but I’m focused on the May 26 $17 put with a DTE of 14, a Vol/OI ratio of 4.37, and a bid price of $1.58. That’s an annualized return of 245.6%.
Upstart’s 52-week low of $11.93 was on May 3. It came close to that in late March and last December. There’s a legitimate possibility it goes back to those levels if a recession hits. You’re paying a net price of $15.42 if it’s put to you, below where it’s currently trading, but not by much.
I couldn’t play this one, but if you’re aggressive and UPST continues higher in the next two weeks, it will be an excellent income play.
But that’s a big if.
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.
