Tomorrow is the start of the final official long weekend of the summer.
Investors have likely turned the page on a poor month in the markets, with the S&P 500 and Nasdaq 100 off by 1.31% and 1.25%, respectively.
However, it could have been much worse if not for this past week’s rally. As I write this late morning on Thursday, the former’s up 2.90% over the past five days, while the latter’s gained more than 4.3%.
It could have been a bloodbath. Now, August 2023 will go down as a mediocre month in 2023.
On Thursdays and Fridays, I like to write about unusual options activity.
Yesterday, I saw three unusually active out-of-the-money put options to sell for income and capital gains.
Upstart Holdings
One of the most unusually active options on Wednesday was Upstart Holdings’ (UPST) Nov. 17 $32.50 put option with $5.70 in premium income for the seller. UPST closed trading 83 cents out of the money.
With 79 days to expiration, that’s an annualized yield of 79%. I’ll take that.
The high yield indicates the risk income investors face with the AI-based lending platform.
UPST stock lost 51% of its value over the past month despite reporting strong Q2 2023 results in early August. The pessimism related to its guidance for the third quarter: it expects revenue of $140 million, down from last year, with a narrower loss of $10 million.
The Motley Fool recently discussed how its 2021 acquisition of Prodigy, an automotive retail software company, would soon start paying dividends for Upstart after relaunching the software as Upstart Auto Retail. The software is an end-to-end dealership solution, combining sales and financing under one package.
Many top automotive brands use the software, with 61 dealerships offering Upstart-powered loans. It makes sense that more dealers will come onstream as more data becomes available.
Another opportunity for Upstart is home-equity lines of credit (HELOC). Its software can get a HELOC approved within five days rather than a month or more through the traditional process.
The increasing use of HELOCs by American homeowners could be a growth driver in 2024 and beyond.
Getting back to the Nov. 17 $32.50 put option. Its volume yesterday was 8,085, 41.68x the open interest. If the shares are put to you in 79 days, the net price paid would be $26.80. It hasn’t traded this low since May.
Aggressive investors ought to like the risk/reward proposition the put option provides.
Digital Realty Trust
Also in the top 25 most unusually active options on Wednesday was Digital Realty Trust’s (DLR) Jan. 19/2024 $120 put option with $4.70 in premium income. It had a volume of 5,257, 23.47x the open interest.
Okay, so the income potential isn’t nearly as great as Upstart. Its annualized yield is 9.3%, which is good, if not spectacular.
Digital Realty Trust is a real estate investment trust (REIT) that owns more than 300 data centers on six continents, helping more than 5,000 enterprises with their data center requirements.
As companies transform their businesses digitally, demand for their solutions rises, leading to higher average rental rates. They’ve increased for five consecutive quarters. At the end of the second quarter, its backlog was $437 million, with $150 million of this to go online in the second half of 2023.
The REIT will continue to accelerate its dispositions and capital recycling in 2023. In April, it estimated that it would sell $2 billion of its assets (midpoint of guidance) in 2023. In July, that was raised to $2.6 billion.
Between capital recycling and at-the-market stock offerings, DLR has raised $3 billion in capital through the end of July.
While DLR stock is up nearly 28% in 2023, its capital appreciation over the past five years is mediocre, up less than 6%. However, its quarterly dividend of $1.22 a share removes some of the sting. Yielding 3.7%, the REIT provides a good income stream for its shareholders.
Your net price paid in 11 weeks would be $115.30. If you have to buy the shares, that’s a good entry point for a long-term buy.
Lululemon
The lifestyle apparel brand had two unusually active put options on Wednesday. One expires in eight days, the other in 50. I’m a big fan of Lululemon’s (LULU) business, so mixing a little income generation with future capital appreciation makes sense with this particular stock.
The two options in question are the Sept. 8 $320 put with a $1.06 bid. The other is the Oct. 20 $290 put with a $1.34 bid. The former has an annualized yield of 12.8%, while the latter’s is a mere 2.6%.
Let’s go with the $320 strike.
LULU’s share price is having a ho-hum year in 2023, up nearly 18%, in step with the S&P 500. Still, certainly not the capital appreciation investors have become accustomed to with its stock, which has outperformed the index by 90 percentage points over the past five years.
It’s had a tough time punching through $400, something it’s only done once in November 2021. In the 33 months since, it’s traded between $300 and nearly $400.
It will do so in 2024. So, too, do analysts. Of the 24 analysts in the Barchart database that cover its stock, 20 rate it a Moderate Buy or Strong Buy with an overall rating of 4.5 out of 5 and a mean target price of $419.13.
So, the odds of it falling to $320 in the next seven weeks seem very remote. Therefore, selling the $320 put is purely for income.
However, if you could get some shares at $320, you’ll be pleased in the long run.
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.
