It’s Friday at last.
On Morning Joe, MSNBC host Joe Scarborough said it felt like Friday on Tuesday. I couldn’t agree more. Maybe it’s just me, but have you ever noticed that the slowest work weeks are often the ones you expected to be so much busier or complicated? It’s Murphy’s Law in action.
Anyway, the S&P 500’s had a good week so far, up 2.4%, extending its gains in 2024 to 10.51%. It didn’t gain 10.51% in 2023 until early June. We are more than two months ahead of last year. At this pace, the index will gain 42% by the end of 2024. That’s just wild.
Sitting down to develop a topic to write about this morning, I noticed something very interesting about Thursday’s unusual options activity (UOA).
Six of the top 10 options by Vol/OI ratio were from three companies. That’s not the most unusual thing about yesterday’s trading. What’s really interesting is that all three companies had two consecutive options in the top 10.
You had On Holding (ONON) with the first and second-highest UOA, Micron Technology (MU) with the 7th and 8th-highest, and Meta Platforms (META) with two tied for 10th.
I’ve only been writing about options for a few years, but rarely have I seen such a focused top 10. Of the 1,315 options with Vol/OI ratios over 1.25, the three stocks accounted for 85, most from Micron and Meta.
That’s a sign of significant investor interest in these three stocks. Of the six options, here are the three I’d focus on.
Have a great weekend!
On Holding
The Swiss-based footwear and apparel company’s options are the Sept. 20 $35 call and Sept. 20 $35 put. The former had a Vol/OI ratio of 86.53, while the latter was 65.79. They both expire in 182 days.
The call’s ask price was $5.55, a 15.9% down payment on its $35 strike. This means you have a right to buy 100 shares of ONON stock for $40.55, 14% higher than Thursday’s $35.61 closing price.
I grant you that the nearly 16% down payment is high. However, with a delta of 0.61767, you can double your money if the shares rise by $8.99 over the next 182 days or 50% if they go up by $4.50, less than the $5.55 you paid for the right.
Usually, you want to double your money with an increase less than the ask price, so this isn’t ideal if you’re bullish about ONON.
The put’s bid price was $3.95, an annualized yield of 22.3%, which is very healthy. If you have to buy the shares, your net price is $31.05, nearly 13% below where it’s currently trading.
If you’re bullish ONON, selling these puts makes sense for income, and should you be wrong, and it retreats into the low $30s or high $20s, your unrealized loss wouldn’t be significant and a better entry point than where it’s currently trading.
Analysts have a favorable opinion of its stock, with a Strong Buy rating from 12 of the 17 covering it, with a $35.94 target price, only slightly higher than where it’s currently trading.
Target prices haven’t increased because it reported a Q4 2023 loss of $0.06 a share, 18 cents worse than the analyst estimate and eight cents worse than a year ago. Its shares fell 10% on the news but have since recouped those losses and then some.
There is no question that it will continue to see significant revenue growth in 2024. However, its valuation is high, with a PEG ratio of 3.16. It can’t afford too many misses in the next few quarters.
Based on this uncertainty, all but the most aggressive investors are better off opting for the call rather than the put.
Micron Technology
Micron had 58 of the 85 unusually active options from the three companies, so you don’t have to choose from the two in the top 10.
The two options in question are the March 28 $105 put and the April 19 $110 put.
The former had a bid price of $0.62 for an annualized yield of 36.5% based on a $109.85 closing price. That would be a desirable income investment if you sold some put options. Your net price paid would be $104.38 should they be put to you next Friday.
As I write this, it’s down 52 cents to $109.48; it would have to fall by nearly 5% over the next week for you to be underwater. Up 27% over the past month, it has been loved by analysts- 23 out of 27 rate it a Strong Buy (4.74 out of 5) -- and Strong Buy according to the Barchart Technical Opinion data.
The latter put had a bid price of $4.25 for an annualized yield of 50.8% based on a $109.85 closing price. That's an even more attractive income investment. Your net price paid would be $105.75 should they be put to you next Friday. It would have to fall by nearly 3.5% over the next week for you to be underwater.
I don’t think you can go wrong with either put. If you want to own MU, the April strike makes more sense because the price paid is higher and more likely to be put to you.
I like the risk/reward proposition.
Meta Platforms
Before I get into its two UOA options, I have to say that no one loves 2024 more than CEO Mark Zuckerberg. According to the Bloomberg Billionaires Index, his net worth is up $52 billion year-to-date, making him the fourth wealthiest person in the world, and he only turns 40 on May 14.
Meta’s two options in the top 10 were the June 18/2026 $370 call and the May 17 $530 put. That’s quite a difference in expiry dates.
The former had an ask price of $206.70, a 56% downpayment, bringing the price paid should you exercise your right to buy in 2026, to $576.70, 14% higher than Thursday’s $507.76 closing price.
Over the past year, the work Meta has done cutting its expenses while reigniting ad sales has led to a 153% gain in its share price. Analysts believe more is on the way. Of the 44 covering it, 39 rate it a Strong Buy (4.75 out of 5), although most target prices aren’t much higher than where it’s currently trading. That could be a valuation thing. Its free cash flow yield is 3.5%. I consider anything below 4.0% to be leaning on the expensive side.
However, if it grows ad revenues again in 2024 while keeping costs low, it’s probably fair value at current prices.
The second option is the May 17 $530 put. It had a $44.70 bid price for an annualized yield of 57.4%. The net price paid should you sell some of these puts would be $485.30, 4.4% below where it’s currently trading.
It could stay in the money over the next eight weeks, making the income potential anything but risk-free.
While I like Meta in the long term, neither option is worth your hard-earned capital.
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.
