On a crazy morning in which PGA superstar Scottie Scheffler got arrested while on the way to his second round at the PGA Championship in Louisville, Kentucky, we’re closing out what looks to be a winning week in the markets.
As I write this before Friday’s opening, the Dow Jones Industrial Average could close out the week above 40,000 for the first time in its history. Investors would have something to celebrate heading into the weekend.
Next weekend is Memorial Day, which means it’s the unofficial beginning of summer. Americans will enjoy BBQs and spend money on fun festivities with family and friends.
To help pay for these festivities, I’ve got three unusually active put options to sell for a bit of pocket money for the Memorial Day weekend.
Have an excellent weekend!
Broadcom
Broadcom (AVGO) is the first of three income opportunities to be offered over the next week. The put in question is the May 24 $1,350 strike with a 7.62 Vol/OI ratio. The bid price was $8.80, an annualized return of 32.5% based on its $1,412.13 closing price from Thursday’s trading.
Out of the money by $62.13 (4.6%), the volume wasn’t huge at 800, about 2% of Broadcom’s 30-day average options volume.
Anytime you’re selling puts, it’s important to answer two questions: First, do you want to own the stock in question, and secondly, what are the odds you will buy the shares at a loss from its trading price at expiration? The former answer should always be yes, while the latter involves considering its trading history.
Of course, if you don’t want to consider either, you sell a put way out of the money and accept a smaller return on your investment.
As stocks go, Broadcom has been a winner for many years. It’s up 388% over the past five years, 2.6x the Nasdaq 100, Broadcom is up 115% over the past year, and up 30% in 2024.
I read an article from May 9 that wondered if Broadcom could buy Intel (INTC). Broadcom’s enterprise value is $718 billion, 4.2x Intel’s, so it’s possible. You can read the article here.
Since 2019, Broadcom has doubled its cash flow from operating activities to nearly $19 billion. It’s a free cash flow machine. Broadcom only buys Intel if it thinks the acquisition will add more cash.
One thing I do know. Analysts love its stock. Of the 28 who cover it, 25 rate it a Buy (4.79 out of 5), with a target price of $1,528.55, 9% higher than where it’s currently trading.
In the worst-case scenario, you have to buy AVGO at $1,341.20. In five years, you won’t be disappointed in the price you paid.
Advanced Micro Devices
Advanced Micro Devices (AMD) is the second of three income opportunities over the next week. Yesterday, AMD had seven unusually active puts.
While the $165 strike expiring next Friday had the highest Vol/OI at 19.44, I’m going with the May 24 $155 strike with a Vol/OI ratio of 3.31. The bid price was $1.43, an annualized return of 45.8% based on its $162..62 closing price from Thursday’s trading.
The volume was 9,380, out of the money by $7.62 (4.9%), about 1.6% of its 30-day average options volume.
It’s unsurprising that analysts like AMD stock -- of the 34 covering it, 29 rate it a Buy (4.68 out of 5), with a target price of $190.75, 16% higher than where it’s currently trading.
AMD stock has had a decent year, up nearly 19%, but it is well behind Nvidia (NVDA), up more than 94%. Since October 2022, the contrast in performance between the two has been even more significant. Historically, I’ve found that the two stocks don’t tend to deliver lights-out performance simultaneously. Given that Nvidia’s on a 20-month roll, it could be time for AMD to do a little outperforming on its own.
In December, Nvidia launched its MI300 GPUs. By the end of March, their revenue hit $1 billion in less than four months. Analysts feel the annual run rate could hit $2 billion by the end of 2024. Combine this possibility with its new Ryzen AI PC CPUs, and you have a couple of growth levers to push its shares higher.
Like AVGO, the worst-case scenario is you have to buy AMD stock at $153.57. I like this income opportunity a lot.
Dollar General
Dollar General (DG) has lost nearly half its value since October 2022, when it traded over $262. That’s not surprising, given the dollar store business in the U.S. has fallen on hard times in recent years. Some of it was self-inflicted.
Dollar General has struggled so badly in recent years that it brought back its old CEO, Todd Vasos, last October, after a year under Jeff Owen, who was Vasos’ COO before retiring in November 2022.
Part of the problem for Owen is he took over precisely when its lower-income customer, who earns less than $40,000 a year, was struggling with higher prices combined with lower SNAP benefits to pay for groceries.
Vasos transformed the company in his seven years as CEO, boosting annual sales by 80% and growing its store count by more than 7,000. He was also handsomely rewarded for those efforts. According to The Guardian, his total compensation between 2015 and 2021 was nearly $183 million.
So far, the company’s turnaround plans are working, albeit slower than investors would like. Its same-store sales in Q4 2023 rose by less than 1%, although its revenues grew 6.9% in the fourth quarter, excluding the extra week in 2022.
While it’s getting stronger, it is the weakest of the three businesses mentioned in my commentary. Of the 27 analysts who cover it, 14 rate it a Buy (3.89 out of 5), with a target price of $151.75, 6% higher than its current share price.
The put option to sell had a $141 strike and a Vol/OI ratio of 8.19. The bid price of $0.60 yielded an annualized 21.3% based on its Thursday closing price of $146.59.
As recently as early April, DG stock traded around $160. It appears to have bottomed around $136 on May 6. While you can never say never, it looks as though your worst-case scenario is that you have to buy at $140.40, and it drops into the high $130s.
In the long term, DG shares should revisit $200.
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.
