Wednesday’s unusual options activity included 806 calls and 421 puts. These contracts expire in seven days or more with a Vol/OI (open interest) ratio of 1.24 or higher.
As you can see below, Clear Secure (YOU), a New York-based airport identity and tech company, had three of the five top unusually active options yesterday. While it had a fourth unusually active option, the Vol/OI ratio was just 2.38, not nearly as busy as the ones highlighted below.
I can’t say whether YOU stock is a long-term buy. I only found out about the company while searching for a good topic for today’s unusual options activity commentary. At first look, however, it does look promising.
I see a potential covered strangle strategy in the works. Here are my thoughts on the stock and strategy.
YOU Stock Has Mostly Floundered
How can that be, you ask? It’s up 34% in 2024. It’s also down 26% in the past month and 12% since it went public in June 2021 at $31. In these 3.5 years, the Nasdaq 100 and S&P 500 are up 50% and 42%, respectively.
If you bought shares in Clear Secure’s IPO and still hold them, you’re probably not happy with their performance.
However, legendary Canadian portfolio manager Stephen Jarislowsky wrote about IPOs in his book The Investment Zoo.
“New issues are typically well promoted …. My experience is that you can buy nine out of 10 new issues at a lower price a year or two later. … I generally avoid new issues…,” The Globe and Mail’s Larry Macdonald quotes Jarislowsky’s book in a 2010 article.
Looking at Clear Secure’s chart from June 2021 to today, it first traded below $31 in December 2021 and stayed below that until October 2024. Since Nov. 6, it’s down 29%, $3.64 below its IPO price.
The man knew what he was talking about.
Why the Big Drop in November
The decline happened on Nov. 7 after it reported Q3 2024 results showing slowing membership growth. It finished the third quarter with 7.15 million active CLEAR Plus members, 0.8% higher than Q2 2024 and 12.2% higher than Q3 2023. This sequential gain of less than 1% was its smallest quarterly gain in two years.
“It’s typical for third-quarter net additions to decline from the second quarter, Clear President Kenneth Cornick said on a conference call with analysts. An August price increase had a ‘modest impact’ on family gross additions and family member retention while increasing dollar retention rates, he said. Clear expects net additions this quarter to increase from the prior period,” Bloomberg’s Richard Clough wrote on Nov. 7.
Meanwhile, revenue in the third quarter of $198.4 million was better than analyst expectations, and nearly 24% higher than Q3 2023. On the bottom line, its adjusted EPS was $0.30, 43% higher than a year ago, but two cents shy of Wall Street’s consensus estimate.
But the biggest kick in the groin was its annual CLEAR Plus Net Member Retention rate of 81.5%, 170 basis points less than Q2 2024 and 700 basis points less than Q3 2023. It’s essentially losing engagement with its members.
Eventually, that could come home to roost, reducing revenue and killing its profit momentum. When Clear Secure went public in 2021, its 2020 operating loss was $18.9 million, down from $56.2 million the year before. The losses increased in 2021 and 2022 before delivering its first annual operating profit of $20.1 million in 2023.
In the nine months ended Sept. 30, its operating income was $89.1 million, up significantly from $4.4 million a year earlier. It's on track to generate five times as much profit in 2024.
Despite the quarter's negatives, its operating margin was 17.7%, 570 basis points higher than a year ago. I could see it continuing to grow revenue at a 20%+ year-over-year pace until it hits 20%+ operating margins.
However, this stock is not a slam dunk.
Why Risk a Covered Strangle?
I’ve been testing a covered strangle strategy in recent weeks. This involves buying a stock, selling a call and put for income. It’s not a covered straddle because that entails selling a put and call with the same expiration date and strike price.
Clear Secure’s two calls and one put were among yesterday's top five unusual options activity. Although they all have the same expiration date of May 16/2025, all three have different strike prices. That makes this a potential covered strangle.
“A covered strangle position is created by buying (or owning) stock and selling both an out-of-the-money call and an out-of-the-money put. The call and put have the same expiration date. The maximum profit is realized if the stock price is at or above the strike price of the short call at expiration,” Fidelity’s website states.
Both calls and put are out of the money, so we’re good to go. Below is a short strangle with a $30 call.
So, in this case, you own 100 YOU shares and sell both the $30 call and $20 put for $3.45 in income. That’s an annualized return of nearly 30% on the premium. The likelihood of generating this profit is 42.4%.
This strategy allows you to generate income while getting a better entry point on more shares. As a result, you have to be more than a little bullish to make this play.
There are two risks with this strategy.
First, if the share price falls to $10 at expiry, you’re down $655 on the put ($16.55 less $10) due to it being exercised, while losing $1,640 from the 100 shares you own falling to $10. This loss is partly offset by $255 in premium on the call, generating a $2,040 loss.
Secondly, the shares blow higher to $40 at exercise. You’re forced to sell the 100 you own at $30 for a $1,000 haircut, offset by $345 in premium, for a net loss of $655.
As the Barchart short strangle page states, “The short strangle strategy anticipates volatility to decrease and the underlying security to trade within a specific price range.”
For this reason, you are better off going with the $40 call and $0.85 bid. Combined with the $0.80 bid on the put, that gives you a nearly 14% annualized return on the premium and a much better exit price on the upside should it race to $40.
Or you can buy a May 16/2025 $40 call. Its ask price of $0.85 is just 3.2% of the $26.25 current share price.
Decisions, decisions.
