As I write this early in Thursday trading, the markets are down on Wednesday’s FOMC meeting, which spelled out the Fed’s interest rate plans over the next year. For starters, investors can expect one more 25 basis-point increase in the fed funds rate.
Perhaps more importantly, the Fed signaled they wouldn’t lower rates as quickly as investors hoped. As a result, the rate is expected to end 2024 at 5.1%, 50 basis points higher than the estimate in June.
It didn’t help that the 10-year T-note yield hit a 16-year high, and jobless claims were the lowest in nearly eight months. All of this points to higher rates for longer.
All that aside, I’m tasked with covering unusual options activity. That, I will do.
In Wednesday's trading, 56 out of the top 100 put options were in the money. I’ve got my eyes on three stocks with put options worth selling for potential income.
Docusign
The Docusign (DOCU) Jan. 19/2024 $270 strike is on my radar. Its bid price of $225.70 is an annualized yield of 1,568%. Of course, there’s a catch: It’s $226.58 in the money. With 121 days to expiration, there’s no chance you won’t be asked to buy the shares at $270.
So, why sell?
Since Docusign went public in 2018, it's never traded lower than the $40s, so the odds of it doing that now are unlikely. Your net price paid based on yesterday’s close is $44.30. However, if it jumps 20% between now and January, you’re looking at an 18% return on its shares.
Yes, you can argue that the safer bet is to buy the shares at current levels, but doing it this way lets you hang on to $4,300 for one-third of a year.
Dollar General
A year ago, I don’t know if anyone could have predicted how badly Dollar General (DG) stock would perform over the next 1o months. It is down 53% over the past 52 weeks.
However, recent analyst comments understandably have put DG management on the hot seat.
On Wednesday, JPMorgan analysts cut Dollar General’s rating to Underweight from Neutral while lowering their price target by $16 to $116, just $2.50 above where it currently trades.
“‘DG’s core low-end consumer is already at a stress point acting recessionary’ given the combination of pandemic-related savings diminished, inflationary pressures, the expiration of child tax care credits and SNAP food stamp cuts, analysts said in a research note,” Yahoo Finance reported.
That is a very bleak picture indeed. I’m just not sure where their core customer will go to shop. If they end up at food banks and drop out as customers, I could see Dollar General getting punished.
However, the jobless claims from today suggest the economy is in much better shape than people realize. I don’t know if it’s media hysterics or political fear-mongering, but things are relatively good. It could be worse; we could have 18% interest rates like in the early 80s.
The Dollar General Jan. 19/2024 $250 put had a bid price of $133.80 yesterday. Like Docusign, the annualized yield of 347% is an aberration. There’s no chance DG stock will appreciate 116% over the next 17 weeks.
The downside risk? DG hasn’t traded this low since March 2019. Its forward P/E is 16.6x, while its P/S is 0.7x, well below its five-year averages.
Of the two, I’d say DG is the riskier put to sell, but not unreasonably.
Nvidia
Of the three stocks mentioned, Nvidia (NVDA) would be the stock I’d most likely hold for the next decade or more. CEO Jensen Huang is just so darn smart and not afraid to make big bets like the one it’s made on artificial intelligence.
I’ll start with the put option and then get into some reasons to own NVDA for the long haul.
Okay, the Dec. 19/2025 $475 strike was 11% in the money at yesterday’s close. That’s not a considerable amount, given the 2.25 years to expiration. A lot can happen in that time.
The bid price of $118.20 is an annualized yield of 19.1%. I’d take that. Based on Wednesday’s closing price of $422.39, the net price paid for NVDA stock should you be asked to do so is $356.80. That’s about a 16% downside before you start losing money.
The big argument against selling puts is your downside is unlimited. When buying calls, your only funds at risk are what you paid for the right to buy 100 shares at expiration.
So, given Nvidia’s run-up over the past year -- it’s up 214% for the past 52 weeks -- an argument can and has been made by many that NVDA stock is due for a significant correction. Judging by the fact Nvidia shares have lost 10% in September, and we’ve still got six trading days left in the month, more losses could be in the offing.
You could continue to track this put over the next week to understand better whether the correction is deepening.
However, September’s a terrible month for all stocks, so it’s not surprising that NVDA has slumped this month. Ultimately, ignoring how much growth AI pumps into the company is hard. Its net income in the second quarter was $6.7 billion, 422% higher than a year ago. One analyst bumped his price target to $1,600 based on the company’s Q2 2024 results and guidance for the remainder of the fiscal year.
Through the first half of the year, its free cash flow was $8.7 billion, 4x what it was a year ago, on $20.7 billion in revenue. The average estimate for 2024 revenue is $54.6 billion. Based on free cash flow, that's 40% of revenue in 2024, it should finish the year with a free cash flow of nearly $22 billion.
I’m not sure how you bet against that.
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.
