Unusual call options activity was reported in Virtu Financial (VIRT), a broker-dealer that was recently sued by the SEC. This serves to highlight the attractive underlying 5.4% dividend yield of the stock today.
The company, which handles 25% of all market orders placed by retail investors in the U.S. according to Reuters, was sued by the SEC in mid-September 2023. The SEC says it misled investors by saying that it protected their confidential information.
Unusual Call Options Activity Highlights Its Value
The Barchart Unusual Stock Options Activity Report today indicates that large numbers of its near-term call options have been traded. That report seems to highlight the underlying value of the stock, especially its high dividend yield.
The report shows that 3,500 call options had been traded at the $20 strike price for expiration on Nov. 17, 2023, which is 37 days from now. However, VIRT stock is trading today at $17.48 per share, which shows that the call options are out-of-the-money (OTM).
The price of the call options was 13 cents at the midpoint. This means that the long buyers of the calls are hoping to see VIRT stock rise to at least $20.13 on or before Nov. 17.
Alternatively, the short sellers of these calls are making a covered call yield of 0.744% over the next 37 days.
Note that this volume is 35 times the normal open interest in this contract. So, likely some large investor has made this trade.
Where This Leaves Investors in VIRT Stock
It seems likely that the initiating trade in this activity was a covered call income play. This is because the market has likely absorbed most of the bad ramifications of the SEC action already.
The stock has stayed flat to slightly higher since the SEC news came out. It seems that the market is not too worried about the issues related to this legal action by the government. Moreover, the company's powerful dividend makes VIRT stock very attractive.
For example, it pays an annual dividend of 96 cents (24 cents quarterly), which it has not raised in a long time. That makes its yield very attractive at 5.38% (i.e., $0.94/$17.48).
Therefore, investors may assume that the company is not likely to cut the dividend with its upcoming results for Q3. That makes selling short an OTM call premium very attractive.
For example, if the investor can repeat the 0.744% yield to be made by shorting the Nov. 17 call premium at $20 every 2 months, the extra income works out to 4.44%.
In effect, then, the investor can almost double the underlying 5.38% dividend yield. Moreover, the total expected return, before any stock price moves, is almost 10%. That is seen by adding the 4.44% covered call yield (every 2 months in an OTM-covered call play) to the 5.38% dividend yield - i.e., 9.82%.
The bottom line is that VIRT stock looks like a good dividend play, and this OTM-covered call play is a way to make additional income for existing shareholders.
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.
