Midway through Thursday trading, Tesla (TSLA) had the most active options volume with 821,083, double second-place Apple (AAPL) at 419,638. There are 15 stocks with options volume over 100,000, so it’s a decently busy day.
As for unusual options activity, there are 132 call options with a volume-to-open-interest ratio of 1.25x or higher. On the put side of the ledger, the unusually active options are 82. All of these options have eight days to expiration or longer.
Today, I will focus on the call options with ask prices of $1 or less, representing 1% or less of the current share price.
Happy Fourth of July weekend to all my American friends.
Warren Buffett’s Bank of Choice
First up is Bank of America (BAC), the bank of choice for Warren Buffett, the world’s seventh wealthiest person. Buffett’s holding company, Berkshire Hathaway (BRK.B), owns 1.03 billion shares in one of America’s largest banks. They account for 8.0% of Berkshire’s $371 billion equity portfolio. Berkshire owns 13.0% of BAC.
One reason Buffett owns Bank of America is because it pays his company more than $900 million in annual dividends. Berkshire helped Bank of America out of a financial jam in 2011, and it’s been benefiting ever since.
In 2017, Berkshire exercised warrants it got as part of its $5 billion preferred share investment in Bank of America. The holding company got warrants for 700 million shares at an exercise price of $7.14. He exercised those warrants in 2017. They generate $616 million in annual dividends.
Although Berkshire doesn’t pay them, Buffett likes dividends and share repurchases. For the average investor who doesn’t like the fact BAC stock has delivered little in the way of capital appreciation over the past five years -- it’s up 2% over 60 months -- Bank of America’s current shareholder yield -- which are the dividends and repurchases, divided by the market cap -- is 5.21%. Get paid to wait for another move up in its share price.
As for the call option with unusual activity, I’m looking at the July 21 $30.50 strike. Its ask price is $0.22, or 0.8% of its $28.70 share price.
With 22 days to expiration and a delta of 0.20348, its share price only needs to increase by 92 cents (3.2%) for its ask price to double in value, allowing you to exit the position with a profit. To consider exercising your right to buy at $30.50, its share price has to increase by 7% to make it worthwhile to buy the BAC shares.
Warren Buffett’s Favorite Holding
My second unusually active call option is the July 14 $197.50 strike. It’s got an ask of $0.35, or 0.20% of its $189.70 share price. Its Vol/OI ratio is 39.00x, making it the third most unusually active call option in Thursday trading.
To exercise your right to buy 100 shares of Apple stock at $197.50, its share price has to increase by $8.15 (4.3%) over the next 15 days. For a company like Apple, that’s a walk in the park. If its shares increase by $2.93 (1.5%), you will double your money, although you’d have to exit the position before July 14.
As for the company, you won’t be able to convince Warren Buffett that it’s all that and a bag of chips. It is Berkshire’s largest holding, accounting for 46.8% of its portfolio.
As Apple goes -- it is mere millions away from hitting a $3 trillion market cap -- so does Berkshire.
While Barchart.com data suggests analysts have cooled slightly on its stock -- 21 out of 28 analysts consider it a Strong Buy or Moderate Buy -- the glass-half-full view indicates that a rating of 4.39 out of 5 isn’t too shabby.
Another Financial Services Play
Over the past five years, Morgan Stanley (MS) has wiped the floor with Goldman Sachs (GS), its investment banking nemesis. MS stock is up 80.7%, 70% higher than GS.
Morgan Stanley has been run by CEO James Gorman since 2010. He is stepping down from the job by June 2024. The company’s board will spend the rest of 2023 working on its succession plan.
There are three internal candidates: Co-presidents Ted Pick, Andy Saperstein, and Dan Simkowitz, the company’s head of investment management. However, as Executive Chairman, Gorman will stick around for a while to ensure a smooth transition.
Since Gorman took the helm, he moved the company’s business strategy to a more asset-light wealth management model. That’s paid significant dividends for its shareholders. It hopes to reach $10 trillion in client assets under management in the next decade by adding $1 billion every three years.
The three internal candidates have been groomed for the CEO job for a decade. They’ll be ready.
As for the call option, I’m looking at the July 14 $87 strike. It’s got an ask price of $0.81, or 0.94% of its current share price of $85.52. Its share price has to increase by 2.7% over the next 15 days to make it worthwhile to exercise the right to buy.
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.
