I’m unsure how I stumbled upon my topic for today’s edition covering unusual options activity.
One minute I was reading an article from ETF provider VanEck about wide-moat stocks. The next minute, I’m offering up three companies whose options are exhibiting unusual options activity midway through Thursday trading.
To make things interesting, all three stocks have at least two options in Barchart.com’s data for Thursday’s unusual options activity. The options all have at least eight days to expiration.
Here goes.
Koninklijke Philips
I honestly can’t remember the last time I wrote anything about the Dutch company.
Koninklijke Philips (PHG) comprises three operating segments: Diagnosis & Treatment, Connected Care, Personal Health. Of the three, the latter is the one most people are familiar with. Its brands include Sonicare electric toothbrushes, Philips electric shavers, Saeco coffee makers, Philips wireless speakers, and many more.
In 2022, the Philips Group generated sales of 17.8 billion euros ($19.9 billion), 2.9% higher than a year earlier. While sales were up, profits were down. Its EBITDA profit was 1.32 billion euros ($1.48 billion), 35.8% lower than in 2021.
CEO Roy Jakobs took over in October 2022. His job was to get the company to execute with a higher level of urgency. Less than a year in, its first-quarter report suggests he’s making some headway, but it’s got a long way to go.
PHG stock has reacted positively to the progress of the turnaround. Its shares are up more than 51% year-to-date. However, they’re still down 45% over the past five years. PHG hit an all-time high of $58.49 in April 2021. It can get back there.
The two options are the July 21 $22.50 put and the Aug. 18 $22.50 call. The bid on the former is $0.30. It has a Vol/OI of 15.91x. The ask on the latter is $1.40 with a Vol/OI of 13.35x.
However, the annualized return is 59.3% if you sell the put. Given the potential upside, if you have to buy the shares in eight days, the net price of $22.20 is reasonable. And, if it moves higher, you pocket some nice income.
Delta Air Lines
Delta (DAL) was my favorite airline during the pandemic because they left the middle seat empty the longest, opting for passenger safety over a little extra revenue.
Its shares are up 63% in the past year and approaching breakeven over five years despite the damage suffered from Covid-19. Business is brisk. Delta reported Q2 2023 earnings after yesterday’s close. It had record revenue and profits, upping its full-year earnings guidance to $6.50 a share at the midpoint, up from the previous estimate of $5.50.
“With this performance, we generated record revenue and profitability in the June quarter,” Barron’s reported CEO Ed Bastian’s comments. “Consumer demand for air travel remains robust.”
With demand surging and oil prices falling, it’s a perfect storm, only in a good way.
As a result of its strong quarter, Delta’s got four options exhibiting unusual options activity today. I will focus on the one with the highest Vol/OI of 8.45x. The Jan. 19/2024 $70 call expires in 190 days.
The ask price is just $0.27, or less than 1% of its current share price of $48.47. To get to $70.27, DAL stock has to rise by 45% over the next six months. Up nearly 50% YTD, the odds are low that it can repeat what it did in the year's first half.
Furthermore, the delta is 0.06192, which means you can double your money on the call with a $4.36 move in its share price. That’s less than 9%, proving an excellent risk/reward proposition.
Lennar
Lennar (LEN) is one of my favorite homebuilder stocks. A well-run operation, LEN stock has more than recovered from its June 2022 lows. Since hitting a low of $64.63 a little more than a year ago, it’s doubled in price, trading within pennies of an all-time high.
In mid-June, I reported Q2 2023 results that were better than expected. Analysts expected earnings to fall by 50%, with a reduction in sales. Instead, its earnings only dropped by a third, with only a slight fall in revenue.
As for its backlog, it stands at $9.5 billion, with an average selling price of $449,000. While off $10,000 from 2022’s peak, it’s still very healthy.
For all of 2023, it expects to deliver 69,000 homes at the midpoint of its guidance, up from its previous guidance of 64,000. That’s $2.25 billion in additional revenue.
Yes, please!
Ok, so Lennar has two options with unusual options activity today. They both expire on Nov. 17, 127 days from now. One is a put with a $115 strike and $2.60 bid; the other is a call with a $135 strike and a $7.00 ask.
Which would you take? For me, they’re both really attractive.
However, if owning the stock is your ultimate goal rather than generating income, I’d probably go with the call. You’re making a 5% downpayment on the stock with an 18-week hold. The share price has to increase by 9%, or $11.88, for you to consider exercising your right to buy 100 LEN shares for $142.
The only downside is that the delta is 0.47349, which means to double your money on the ask price, it’s got to go up by $14.78, which is almost $3 higher than what you need to consider exercising your option.
The put, on the other hand, is intriguing.
The bid price of $2.60 is an annualized yield of 5.7%. That’s not great, but it’s not horrible, either. Let’s call it mediocre. However, should the economy get a little bumpy in the fall, it’s not hard to imagine homebuilder stocks correcting by 10-20%. That would get close to $115, a better entry point than you’d currently obtain.
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.
