It’s hard to believe that July is almost over, and the dog days of summer are upon us. Not to mention virtually the entire country is under heat alerts. It’s hot out there.
Yesterday, the Federal Reserve did as expected, raising the federal funds rate to 5.25% and 5.50%. With another potential increase in the cards later this year, interest rates are already higher than in 2022 years.
Despite another interest rate hike, the markets are remarkably resilient, suggesting that stocks could move higher from here.
Whatever happens, I see three stocks from three sectors exhibiting unusual options activity in early Thursday trading.
Stay cool out there.
It’s Got a New Drug
No, I’m not referring to Putney Drug, the fictional pharmaceutical company old-time stockbroker Lou Mannheim recommended in the movie Wall Street. I'm referring to Seagen (SGEN), the Bothell, Washington, biotech company that develops and commercializes cancer drugs and treatments.
Its June 21/2024 $135 put is throwing off huge volume early in Thursday’s trading. Through the first hour-and-a-half, 10,006 put contracts have traded, 84.80x its open interest. The current bid price of $2.00 translates into a paltry annualized yield of 1.1%.
So, why should you give the $135 strike a look? Especially since it’s accepted an offer from Pfizer for $229 a share.
Well, not for the income. You can do much better in a one-year certificate of deposit with your bank.
However, selling the $135 put with 330 days to expiration and nearly 30% out of the money allows you to buy its shares at a much lower price a year from now should the deal fall apart.
The $200 you’ll pay is 1.0% of its current share price of $191.67. That’s not a lot for the opportunity to buy Seagen stock at a 31% discount to its current price and a 42% discount to Pfizer’s offer.
A lot can change between now and next June.
Pfizer’s (PFE) proposed $43 billion bid for the company faces regulatory pushback. In mid-July, Seagen informed investors and the Securities and Exchange Commission that it and Pfizer had received a second request for information from the Federal Trade Commission.
Seagen and Pfizer expect the deal to close by the end of 2023. However, should the FTC want to take a closer look based on antitrust grounds, the deal’s closing could be pushed back beyond June 2024.
Given the FTC’s opposition to Amgen’s (AMGN) purchase of Horizon Therapeutics (HZNP), it’s possible, although unlikely, that the deal doesn’t happen at all.
Consider this a merger arbitrage play.
Streaming Is a Money Maker
No, I’m not talking about Netflix (NFLX). I’m referring to a financing arrangement used in the mining industry. Company A agrees to buy a predetermined amount of precious metals production from a miner (Company B) at a discounted price in return for upfront financing for future growth.
Wheaton Precious Metals (WPM) is a leading streaming company with agreements with 21 operating mines and 13 in development. It has gold and silver streaming agreements with large miners such as Vale (VALE) and Glencore International (GLNCY).
The company announced in May that it had acquired a gold stream with Lumina Gold (LMGDF), a junior gold and copper miner that trades on the TSX Venture Exchange.
The deal sees Wheaton pay upfront cash of $300 million to Lumina, which will use the money to build its Cangrejos gold and copper mine in Ecuador. The mine will have high margins and a 26-year life.
Approximately $48 million will be available to Lumina before the construction starts on the mine, while the rest will be doled out in stages over the project's life.
In return, Wheaton increases its proven and probable (P&P) gold reserves by 760,000 ounces. It now has 14.25 million ounces of proven and probable gold reserves. In addition, it has 482.7 million ounces of P&P silver reserves.
Wheaton finished Q1 2023 with net earnings of $111.4 million, down 29.3% from $157.5 million a year earlier. The decline in earnings was primarily due to the end of production at three of its streaming mines, along with a 5% decline in gold prices.
Long-term, it’s got a bright future.
The Sept. 19 $42 strike has a Vol/OI ratio of 10.83x. The current bid is $1.05, which is an annualized yield of 17.5%. With 50 days to expiration, it's 5% out of the money. If you have to buy the shares at a net price of $40.95, you’d be getting a good entry point for a long-term hold.
So, it’s both an income and capital appreciation play.
The Volkswagen Buy-In Really Helps
Chinese electric vehicle (EV) maker Xpeng (XPEV) got a big boost yesterday when it announced Volkswagen (VWAGY) would invest $700 million in the company.
The two companies said they would jointly develop two EVs for the Chinese market under the VW brand as part of the deal. The two will be mid-sized vehicles based on the Xpeng G9 midsize electric crossover SUV.
XPEV shares gained more than 26% Wednesday on the news. Today, they’re up nearly 7% on top of yesterday’s gains. Yet, despite all the positive price action, its share price is still down more than 16% since July 2022.
There is no question this is good news for Xpeng as it continues to fight Tesla (TSLA) and its other peers for market share in China.
While I’ve got six unusually active puts to choose, the Aug. 18 $19.50 strike has the most appeal. Volume is 624, 5.38x open interest. However, the bid price of $1.08 means if you sell the put and the share price over the next 22 days remains above $19.50, you pocket $108, an annualized yield of 86%.
Currently trading at $20.92, its shares would have to fall 12% over the next three weeks for you to be out of pocket.
The good news suggests this won’t happen.
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.
