As we move through the holiday season, trading activity will indeed slow. However, with one work week left before much of Wall Street and Main Street shut down, I thought I’d look at Wednesday’s unusual call options activity to find some exciting bets.
I've scanned the Barchart.com options data to look for patterns emerging. In a bit of a twist, I’ve noticed multiple stocks from yesterday's trading with two or more call options expiring on the same day.
It might be interesting to take five of those stocks that, for good or bad, are compelling possibilities and come up with the best bet among them.
The Stocks In Question
The five names are Ford (F), Gildan (GILD), Pfizer (PFE), PDD Holdings (PDD), and United Rentals (URI).
At least two of them, Pfizer and Gildan, were in the news this week, not in a good way.
Of the other three, my favorite long-term buy would be URI. An equipment rental business might be what Wayne Huizenga -- he founded three Fortune 500 companies in his lifetime: Waste Management (WM), Blockbuster Video, and AutoNation (AN) -- would be running today were he still alive.
You buy inventory, rent it out repeatedly until you’ve paid off the equipment, and then watch the cash flow take off. United Rentals is such a business. However, its inventory is a little more expensive than videotapes.
Now, let’s look at each of the five stocks and their unusually active call options.
United Rentals
Starting with the best of the five, United Rentals had two unusually active call options on Wednesday with a volume-to-open-interest ratio of 1.25 or higher.
The two calls: June 21/2024 $700 and June 21/2024 $680. Both expire in 190 days. Both are significantly out of the money. The former had an ask price of $9.90 and a down payment of 1.4%. Anything under 3% is a good bet. The delta was 0.16107. The latter’s ask price was $12.70, with a 1.9% down payment and a 0.19421 delta.
My instinct is always to go for the lowest ultimate price you would pay were you to exercise your right to buy the shares. With the latter, you’d pay $692.70, $17.20 less than the former.
The tricky part for either of them is that the URI shares must appreciate by at least 28% over the next seven months to make it worthwhile for you. There’s no question United Rental’s stock has the right stuff to make such a move -- it’s up 34% over the past six months and 416% over the past five years -- but we have no idea what’s in store for the economy in 2024, other than the fact we’ll likely see some rate cutting.
Considering the deltas, you could double your money on the $700 call with a $61.46 move higher, compared to a $65.39 move for the $680 call.
Ultimately, if you want to own URI stock, the lower net price is the way to go, making the $680 call the better bet.
Onto the other four names.
PDD Holdings
PDD Holdings is the holding company that operates the Pinduoduo e-commerce platform in China and the Temu e-commerce platform in the U.S. and internationally. Since hitting its March 2022 low of around $32, PDD stock’s been on a tear, up 366%, and only $62 from its all-time high of $212.60 in February 2021.
PDD reported blowout earnings in late November, crushing analyst expectations. It earned $1.64 a share on revenue of $9.7 billion. t=The top line exceeded expectations by 25%, while the bottom line was 34% higher than the consensus estimate.
With operating margins above 26% and very little debt, PDD gives URI’s business a run for its money and then some. The only downside is that some investors are hesitant to own Chinese companies.
The calls in question are the June 21/2024 $175 call and June 21/2024 $165 call. Their respective ask prices from Wednesday were $21.75 and $24.95, representing 12.4% and 15.1% down payments, respectively. The further out the expiry date, the higher the ask price.
With a double-digit down payment, unless there’s a big move in the first 200 days, I will be looking to sell the options before the 400 days expire. The $165 call gives me a better chance to do so. The shares need to increase by $43.85, $1.84 less than the $175.
That, in itself, requires a 30% move. I wouldn’t dish out $2,495 for the $165 call, but that doesn’t mean you shouldn’t.
Ford
With the Ford calls, we’re going way out. Funnily enough, there are two calls with 736 days to expire and two with 764 until expiration. Both have $20 and $22 strikes.
At first, I was going to go with the 764 DTE, but the 736s have the lowest ask at $0.21, a 1% down payment on the Dec. 19/2024 $22 call. With two years to expiry, Ford has plenty of time to determine where it wants to go with its electric vehicle (EV) program.
The company said it would delay about $12 billion in EV manufacturing investments in October, citing an unmotivated North American consumer.
“The customer is going to decide what the volumes are,” CNBC reported Ford CFO John Lawler’s October comments. “Ford is able to balance production of gas, hybrid and electric vehicles to match the speed of EV adoption in a way that others can’t.”
Ford stock dropped below $10 on the news. It gained all that back and then some with a November and December rally.
Currently trading around $11.80, it will have to nearly double over the next two years for you to consider exercising your right to buy at $22. Only once in the 21st century has its share price traded above $20: January 2022.
Fortunately, the bet’s just $21.
Gildan
Gildan is the first of two names making news this week, in a bad way.
Co-founder and longtime CEO Glenn Chamandy was bounced from the top job by the board after serving as chief executive of the apparel and sock manufacturer since August 2004. He and his brother Greg founded the company in 1984 in Montreal.
Chamandy was replaced by former Fruit of the Loom executive Vince Tyra, who officially starts in mid-February. Chamandy owns 2% of its stock but has also been dumped from the board.
GILD stock has been on a wild ride since 2015. It currently trades where it did eight years ago. However, in the interim, its shares have fallen as low as $10 (March 2020 market correction) and as high as the mid-$40s at the end of 2021.
This is a company with some dysfunction at the moment.
On Wednesday, Gildan had nine call options with unusual options activity that expires in 36 days on Jan. 19/2024. The strike prices range from $30 to $70. All of them are in the money.
I’m not 100% convinced that 36 days is enough time for a company whose new CEO doesn’t even start until after the options expire. If I had to buy one of them, it would be the $70 strike with a $14.90 ask.
Pfizer
One of the drug companies that got us through Covid, Pfizer, reported earnings Wednesday before the markets opened. They could have been better. It suggested that its 2024 revenues could be as much as $5 billion below analyst expectations. In 2022, it generated $57 billion from its Covid-19 vaccine. It expects $8 billion in 2024.
CEO Albert Bourla admitted that the company was being very conservative in its guidance not to mislead investors. It didn’t matter. PFE shares fell nearly 7% on the news.
A 7% drop in a stock’s share price isn’t a big deal. However, when your shares are down 52% over the past year and 36% over the past five years, it’s a sign investors have thrown in the towel.
As for the call options, three expire in 64 days on Feb. 16/2024. The strike prices are $25, $27, and $29. The $29 strike had an ask price of just $0.40. To double your money on the option by selling before expiry, the share price must increase by $1.71, the lowest dollar of the three. Only the $25 strike is currently in the money. Given that PFE stock is trading at the lowest point in the past five years, it might be worthy of consideration, but if it were me, I’d put out as little as possible on this one.]
Pfizer looks to be dead money in 2024.
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.
