Wednesday's action for Upstart Holdings (UPST) was off the charts. I can't remember when the AI lending platform had such a big win.
Investors liked the news, sending its stock up nearly 32% on the day. It is now up 44% year-to-date and 170% over the last year, although it has a long way to go to reach its 2021 all-time high of $401.49.
There’s a lot to unpack here.
However, if its unusual options activity is any indication, Upstart’s stock could be on a roll that will continue for a long time.
Yesterday, it had 21 options with Vol/OI ratios of 1.24 or greater, expiring in a week or more. In addition, its options volume was 325,649, nearly 6x its 30-day volume. Its share volume was about the same multiple higher.
I don’t think there’s any question investors have spoken loudly about the company’s potential and that of its stock.
This all bodes well for the future. Here’s why.
Upstart’s Come a Long Way
Starting in Q2 2022, Upstart had a 10-quarter run of consecutive EBIT losses totaling $514 million. That’s why it finished the fourth quarter with an accumulated deficit of $411.2 million.
It’s going to take some time to pull out of that. The $2.7 million EBIT profit in Q4 2024 is a start.
In 2025, upstart expects revenue of $1 billion, 57% higher than $637 million in 2024. In terms of profitability, it expects an adjusted EBITDA margin of 18%, 9x higher than in 2024.
In 2024, it originated nearly 698,000 loans for $5.9 billion, 28% more than the previous year. I don't claim to be an expert on Upstart’s business, but I would guess it would close to a million loans in 2025, with a loan value of $10 billion.
Equally important, its conversion rate in the past year was 16.5%, 680 basis points higher than a year earlier. The conversion rate is the number of loans divided by the number of legitimate rate inquiries. The higher the conversion rate, the better.
If it could generate a 20% conversion rate in 2025, it should deliver GAAP profitability in 2025. Investors likely think the same thing, hence the big move in its share price.
I've always thought Upstart’s AI-based business model was an interesting, out-of-the-box solution to expediting loans for its bank customers. However, my interest in the stock waned after 10 consecutive quarters of losses.
These latest numbers suggest it might have overcome many issues that plagued it in 2023 and 2024. We'll see.
Yesterday’s Unusual Options Activity
As I said in the introduction, Upstart’s options volume was extremely high yesterday relative to its recent history. The last time it had this kind of volume was in November, a one-off.
Yesterday’s options volume produced significant unusual options activity. Of the 21 with Vol/OI ratios greater than 1.24, the five below were over 10. They’re the ones I’ll focus on making a bet that Upstart’s momentum will continue.
All five are relatively short-duration options, the longest being 37 days for the $75 put expiring on March 21. It’s 15.5% out of the money. On this one, you could buy 100 shares at current prices and 1 $75 put for $2.73, or 3.1% of its share price.
That’s good downside protection. I like it.
Now, if you believe that the long-term trend for Upstart is higher, but you think there might be a correction in the near term, you could hold off buying shares, instead selling either the $85 or $80 puts expiring on Feb. 1. The income on the former would be $2.32 (105.4% annualized return) while the latter would be $0.99 (45.44% annualized).
Of these two, if you want to buy the stock at a better price now, I’d go with the $85 strike. However, if you’re patient, rolling put options every nine days could give you an even better entry point while generating a little spending money. It’s comforting to remember that selling puts has unlimited potential downside losses, although the nine-day DTE helps minimize that concern.
That leaves us with the two calls. One expires in nine days and the other in 16. The $60 call expiring on Feb. 28 is 32% in the money. You’re looking at paying $90.40 for the stock should you exercise your right to buy 100 shares of UPST stock. It has to appreciate by at least $1.63 (1.8%) for you to consider exercising this right.
Given Upstart’s momentum—it has averaged 5.6% weekly gains over the past six months—it looks pretty doable.
The second call is the $90 strike expiring in nine days on Feb. 21. The ask price of $4.00 is 4.5% of its share price. That’s a tad high with only nine days to expiration, but it’s not excessive, given UPST stock must appreciate by $5.23 (5.9%) for you to consider exercising your option seriously. However, you do have a fallback. If it appreciates by $4.11 (4.6%), you can sell for a 50% return on your call before expiration. That removes some of the risk but not all.
This last one is a tough call (pun intended) because the $60 strike is so much more expensive. You’re putting out $3,040 without a 100% guarantee of success. On the other hand, the $90 call is just a $400 outlay, but with a far greater probability that you’ll lose money on the trade.
Bottom line: If you think it’s headed to $100 and beyond, I’d buy 100 shares under $90 and one $75 put expiring in 37 days. If you’re less bullish, I like the $90 call expiring in nine days.
Anyway, you slice it; investor interest in Upstart is back.
