Unusual Activity in Lyft Put Options Highlights Its Underlying Value

LYFT Inc (LYFT) put options today are showing large unusual activity. This may be because Lyft recently said it expects positive free cash flow in 2024. As a result, the underlying value of LYFT stock is now apparent. This put activity may be from short sellers as an income play.

I highlighted the upside potential in LYFT stock in a recent Barchart article: “Lyft Makes Positive Free Cash Flow and Expects This for 2024 - Could Lift LYFT Stock 25% Higher.” I wrote that after its earnings release on Feb. 13, the stock could be worth as much as $22.39 based on its free cash flow (FCF). At the time LYFT stock was at $17.91

Today, the stock is at $18.35 and the Barchart Unusual Stock Options Activity Report shows that there is a large tranche of puts traded at the $17.00 strike price. The expiration date for over 2,900 contracts traded at this strike price is March 22, just over two weeks away (16 days).

Barchart Unusual Stock Options Activity Report - March 6 - LYFT Puts expiring March 22

This means that either these put investors think the stock is going to fall over 7.35% within the next 2 weeks (i.e., $7.00/$8.35-1), or else short sellers of these puts believe the stock will stay where it is or even rise.

Why This may be a Short Sale Initiated Trade

After all, the latter group may be making an immediate yield of 2.41% since the premium received is 41 cents. This is because by securing 1700 per put contract the investor can immediately receive $41, or 2.41% of the investment.

In this case, since there are over 2900 contracts traded, the income received is $118,900 on 2,900 contracts (i.e., $0.41 x 100 x 2,900). This requires $4.93 million in cash secured (i.e., 100 x $17 x 2,900). That is a very good return for many trading desks.

I tend to believe that many of the initiating transactions for this activity is from short-put sellers as a result.

Price Target

Another reason is that LYFT's upside looks very good. As I wrote in my last article, Lyft produced a Q4 FCF result and says it expects to convert roughly half of its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) into FCF.

In Q4 the company generated a 1.8% adj. EBITDA margin. Analysts now project $5.11 billion in revenue this year. So, if this EBITDA margin lasts, Lyft could make $92 million in EBITDA in 2024. Taking half of this as free cash flow based on the company's guidance brings FCF for 2024 to $46 million.

This is important since the stock can be valued based on this FCF figure. For example, if Lyft were to pay out 100% of this FCF as a dividend, the stock could end up with at least a 0.50% dividend yield. After all, Meta Platforms (META) recently paid a first-time dividend and it has a 0.10% dividend yield.

So, if we divide $46 million by 0.50% we get a potential market cap of $9.2 billion. That is over 36.4% higher than its existing $6.74 billion stock market value. In other words, LYFT stock could be worth as much as $25 per share (i.e., over 36% higher than today's price).

The bottom line is that this put option activity in LYFT stock may be highlighting its underlying value.

On the date of publication, Mark R. Hake, CFA 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.