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Unusual activity in options in Texas Instruments (TXN) shows that an institutional investor has a bullish outlook in the stock. This was initiated by a large volume of TXN short put and call options with the same expiration period. This is seen in Barchart's Unusual Stock Options Activity Report on April 5.
The report indicates that 10,000 puts traded at a strike price of $160, or $16.66 below today's price of $176.66 for expiration on May 19. That makes it 9.4% below today's price. The put option has just 44 days until expiration.
The institutional investor who initiated this trade was likely shorting this deep out-of-the-money (OTM) put and immediately received $2.24 for every put option contract. That means the investor received an immediate yield of 1.4% (i.e., $16.66/$160).
The reason why this was likely initiated as a short put was that a large volume of OTM call options was also traded at the same time with the same expiration date. The Barchart report shows that 20,000 calls were shorted at $190, or 7.55% over today's spot price. The investor received $2.15 per put contract, giving the investor a covered call yield of 1.21%
This means the investor has received a total of $4.39 on the spot price of $176.66, or a yield of 2.49% with just 44 days until expiration. That amount of premium income also helps increase the total return if the stock rises over the $190 call strike price on or before May 19. In addition, on the put side the breakeven point is lowered to $155.61, or 11.9% below today's price.
In effect, then, the investor believes that TXN stock will trade in a range between $160 and $190 over the next month and a half. Why would they think this?
TXN Stock Is Moderately Priced Today
Texas Instruments will report its Q1 earnings on April 25, well before the expiration of these unusual puts and calls. Right now the global semiconductor company is still profitable and analysts expect it to make $7.62 in earnings per share (EPS) this year. That is well below the $9.41 in EPS last year, although the Q4 earnings beat analysts' estimates. This also puts TXN stock on a forward P/E multiple of 23x earnings.
More importantly, the company is likely to keep paying its quarterly dividend of $1.24 per share, giving it an annualized yield of 2.81% on a 65% payout ratio (i.e., $4.96/$7.62). In addition, analysts still expect TXN to produce powerful free cash flow (FCF) which will be sufficient to pay the dividend.
However, there is also some room for concern here. For example, last quarter's FCF was $ 1.075 billion, but the dividend cost $1.123 billion. Moreover, TI spent an additional $848 million on share buybacks. In effect, the company had to reduce its cash balance to make some of the dividends and all of the buyback payments.
Nevertheless, TXN stock is up over 8% YTD as it looks to be moderately priced, not overvalued here. In addition, as long as Q1 earnings and FCF show that the semiconductor company's capital return payments can be upheld throughout the rest of the year, TXN stock is likely to trade between $160 and $190 by May 19.
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.
