My routine on Fridays here at Barchart.com is to discuss two or three potential options to buy or sell. For today’s piece, I’ll focus on potential income opportunities.
As I write this early in Friday’s session, option volume is steady, if not spectacular, at 13.7 million. That compares with the average daily options volume of 40.4 million. Moreover, the put/call divide is split between 45% puts and 55% calls. It’s a sign investors are slightly bearish at the moment, but nothing crazy.
Of the top 100 unusually active options, 57 are calls, and 43 are puts. I’m going to focus on the puts. Here are two puts to sell for income that has exhibited unusual options activity in recent trading.
Have an excellent weekend!
You Have to Love Nvidia
Nvidia (NVDA) CEO Jensen Huang is one of my favorite American executives. He exudes humble confidence while constantly driving the company to be on the leading edge of tech innovation.
In February, Kiplinger contributor Dan Burrows pointed out that Nvidia’s annualized total return over the 24 years it’s been a public company was 26.9%, almost 3x higher than the S&P 500. No wonder Kiplinger named it one of the 30 best stocks of the past 30 years.
However, Huang knows that to be one of the best 30 stocks of the next 30 years, Nvidia has got to be at the forefront of new technology innovation. For Huang, artificial intelligence (AI) is the big secular trend that will change our world.
“The warp drive engine is accelerated computing, and the energy source is AI,” Huang said in his keynote at the company’s GTC conference. “The impressive capabilities of generative AI have created a sense of urgency for companies to reimagine their products and business models.”
There isn’t a day that goes by when I don’t consider AI and what it can do for me and my business.
As for Nvidia, it will continue to deliver new products, such as its H100 NVL with dual-GPU NVLink. “H100 can reduce large language model processing costs by an order of magnitude,” Huang said at the GTC conference.
Over the past five years, Advanced Micro Devices (AMD) has delivered superior returns to Nvidia. Still, Huang’s company is coming on strong, up 136% over the past six months, double AMDs return.
In Thursday trading, Nvidia had five put options with unusual options activity (Vol/OI greater than 1.25x), four expiring in 14 days. The fifth is the one that caught my eye. It expires in 189 days.
The Oct. 20 $280 strike had a bid price of $40.60 with a Vol/OI ratio of 6.13x. The strike was about 5% above Thursday’s closing price. So, we’re looking at six months to determine whether or not the put buyer will have to pay for the 100 shares.
If it expired tomorrow, you’d have a premium income of $4,060 but no shares. That’s a 15.3% return over half a year, or 30.6% annualized. Not too shabby.
As I write this, the Oct. 20 $280 put has a bid price of $39.90, down $70 from yesterday, but still very attractive.
Oil Remains Attractive
The second put on my list is Marathon Oil (MRO), the Houston-based oil and gas exploration and production company.
Its stock has been on a rollercoaster for the past 12 months. It’s down nearly 4% over the past 52 weeks. On four occasions, it’s traded below $22 and above $32 on two others. As I write this, it’s at $25.63, slightly below the halfway point between its high and low for the year.
Where it heads over the next 12 months depends on the oil price over the remainder of 2023. I doubt a barrel of oil will return to the $20s anytime soon. That said, it’s hard to know whether a $100+ barrel is in the cards either. My guess is a price between $75 and $100 is where it will fluctuate over the next eight months. We’ll see.
One thing MRO has going for it is that analysts like it. The 18 analysts rating the company’s stock give it a Moderate Buy (4.33 out of 5) with a mean target price of $34.23, 34% higher than where it’s currently trading.
As for the company, 2022 was a good year, with $8.04 billion in revenue, 47.0% higher than in 2021, and an operating income of $3.95 billion, 201.5% higher than a year earlier.
Even though its stock hasn’t performed over the past year, shareholders haven’t suffered too much. In 2022, it returned $3 billion to shareholders through dividends and share repurchases. That’s a distribution yield of 17%. But, of course, you’re getting paid to wait for the share price to run to $35.
In 2023, management plans to spend $1.95 billion on its capital budget (midpoint of guidance) to generate $2.6 billion in adjusted free cash flow. This assumes an $80 barrel of oil.
Its goal in 2022 was to return 40% of its adjusted free cash flow to shareholders -- it returned 75% -- it has the same 40% goal in 2023. As long as the status quo is maintained, I expect Marathon to deliver more than its stated goal to shareholders.
Marathon is performing exceptionally. Its stock is worth owning. However, the income play also looks attractive.
Marathon had one put that was exhibiting unusual options activity on Thursday. It was the May 19 $$25 contract. It had a bid price of $1.02 with a volume of 1,909, 5.84x open interest, and 35 days to expiry.
Based on a closing price of $25.66, that’s a yield of 4.0% on the premium income. Annualized, that works out to 42%. So I’ll take that return.
In Friday's action, the May 19 $25 strike has just four put contracts traded, with the bid down three cents and the share price up a few pennies. Nevertheless, the annualized total return remains over 40%.
I would be shocked if, in 35 days, MRO traded below $25, and you were forced to buy the 100 shares. However, were that the case, the risk/reward at current prices is excellent.
On the date of publication, Will Ashworth 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.
