Opinions are cheap — everybody’s got one and it doesn’t cost anything to broadcast it on social media. However, weighted opinions, particularly opinions backed by big institutional money, is always worth paying attention to. And that’s the beauty of Barchart’s Unusual Stock Options Volume indicator. Here, you get a snapshot of the 500 securities that are attracting unusual trading behaviors, for better or for worse.
One potentially positive highlight is STMicroelectronics (STM). Based in Geneva, Switzerland, STMicroelectronics — better known simply as ST — is a semiconductor firm, specializing in the design, development, manufacturing and marketing of a broad range of integrated circuits and discrete devices. While it doesn’t have the pizzazz of a frontline semiconductor player, it plays a vital role in the enablement of advanced technologies.
As a leading developer of microcontrollers, sensors and power management chips, ST is indispensable for the automotive industry. In addition, its intricate semiconductor work provides the brains and sensors behind numerous connected devices, making it a valuable component of edge computing and Industry 4.0 applications. Further, ST’s power management and signal processing specialties enable artificial-intelligence hardware to work more efficiently.
To be fair, though, the narrative behind ST and the performance of STM stock have been miles apart. As exciting as the underlying enterprise sounds on paper, a quick look at the price chart — revealing a more than 43% loss over the past 52 weeks — is enough to dampen enthusiasm. Issues such as ST’s exposure to cyclical markets and valuation compression have led to sharp volatility.
In addition, President Donald Trump’s tariffs and subsequent trade wars have done little to help sentiment for STM stock. However, the administration may grant a reprieve on semiconductor levies, which then buoyed the sector. While the usual suspects popped higher in response, the intriguing wager could be on ST.
The Whales See a Floor in STM Stock
Thanks to the positive headline in the semiconductor space, several big money traders — the so-called whales — began buying call options of promising chipmakers. However, in the case of STM stock, these institutional investors sold put options. It’s a subtle trade, but against a wider context, is arguably very meaningful.
First, options flow — or the flow of money into big block transactions in the derivatives market — on Monday had positive implications, with net trade sentiment reaching $142,500. Second, the biggest transaction carrying bullish weight was for sold (or written) $27 puts expiring on May 16 of this year.
As a recap, a put option gives the holder the right (but not the obligation) to sell the underlying security at the listed strike price. Obviously, those who buy puts are pessimistic about the target security’s prospects; that’s why they’re paying a debit for the right to sell the stock in question at a higher price than where they perceive it will ultimately land.
On the other end of the equation, put sellers underwrite the risk that the target security will not fall below the strike price. If indeed the equity slips below the breakeven threshold, sellers would be obligated to buy the underlying security under exercise, a process known as assignment.
The thing is, while put sellers may not believe that the security will fall, if it does, the breakeven threshold represents the point at which these sellers are comfortable buying the stock in question. Regarding STM stock, the $27 puts were sold at a bid price of $3.30. Subtract this premium from the strike and you get $23.70, the point at which certain whales are comfortable owning ST shares.
Interestingly, STM stock appears to be forming a rounding bottom formation, with a potential support line at $24. If this is really the case, the unheralded semiconductor firm could make for a compelling acquisition.
Two Ways to Approach STMicroelectronics
For those interested in taking a shot in ST, there are two basic approaches available. The first one is straightforward: buy STM stock in the open market. Over the intermediate term, the bulls will almost surely focus on the $30 level. It’s psychologically significant and represents a prior area of support.
A riskier but far more lucrative approach is to use a multi-leg options strategy known as the bull call spread. Specifically, I’m very intrigued with the 24/25 bull spread for the options chain expiring April 17. This trade assumes that in 24 calendar days, ST will reach or exceed the $25 short strike price. If it does, the maximum payout stands at 100%.
On Monday, STM stock closed at $24.32. Therefore, it only needs to move up less than 3% over the next three-and-a-half weeks. Now, the rub is that if STM exceeds the target prior to expiration, you could pull out of the trade early but at the expense of remaining time value of the spread.
Generally, that’s a good problem to have. Certainly, it would be preferable to STM stock not rising at all, which would likely result in this spread being completely worthless. This is the allure — and the danger — of leveraged options trades.
