As I write this midday Friday, seven of the 20 most usually active put options are Tesla (TSLA). That’s a surprise to absolutely no one. Sometimes, I think it’s the only stock that gets any action from investors.
However, as I scan the top 20, there are several other stocks whose put options stand out. One of them is Carvana (CVNA). It has 6 of the top 20 puts. Combined with Tesla, they control nearly 70% of the unusual options activity.
There are, however, seven companies with one put option in the top 20. Here are three that capture my imagination.
Target’s Bound to Bounce Back
The put in question for the discount retailer is the Aug. 18 $125 contract with a $5.75 bid. The volume on the option is 2,558, 9.88x its open interest.
Target (TGT) is down 2% on the day and 18% over the past month. As a result of its early summer swoon, it’s now down 15% in 2023, nearly 22 percentage points worse than Walmart (WMT).
The big reason for Target’s slide is its eroding margins. Don’t believe the hype from specific segments of society boycotting Target because it supports the LBGTQ+ community. The downward spiral has everything to do with lower profits.
That said, its Q1 2023 gross margin was 26.3%, 6o basis points higher than a year earlier. However, due to higher overhead costs, such as higher pay for its staff, the operating margin fell by 10 basis points in the quarter to 5.2%.
Historically, Target’s gross margins have been closer to 30%, while its operating margins have been between 4% and 6%, so there are definitely issues with its profitability.
However, the last time TGT traded this low was in August 2020. So, the opportunity to get shares at a net price of $119.25 over the next 70 days is an excellent risk/reward proposition.
Healthcare Offices Aren’t Going Away
This second put option is a much riskier proposition than Target.
I’m looking at the July 21 $2.50 contract for Diversified Healthcare Trust (DHC), a real estate investment trust (REIT) that owns office buildings leased to medical providers and other medical-related businesses.
While public companies owning office space are getting hit in 2023 as the work-from-home (WFH) movement becomes a hybrid affair, DHC’s space isn’t going away because of the WFH movement. Doctors still see patients in physical locations despite telehealth becoming a thing.
However, DHC is selling itself to Office Properties Income Trust (OPI) for the equivalent of $1.70 a share, below where it’s currently trading. The all-stock deal will see its shareholders receive 0.147 OPI shares for every share held in DHC. DHC shareholders will own 42% of the combined company, with Office Properties owning 58%.
The big selling point to the deal is that DHC shareholders see their annual distribution increase by 267% to $1.00 from $0.04 a share. Many investors aren’t happy about the price DHC management accepted. Class action lawyers are looking to extract further consideration from the two companies.
At one time, DHC stock traded near $20. With 42 days to expiration, should the share price rise, put sellers are looking at an annualized yield of 105%.
The Best Bank Possible
The final of my three puts is the JPMorgan Chase & Co. (JPM) Dec. 19/2025 $140 contract. It currently has a bid price of $16.70. That’s an annualized return of 4.7%.
So, you’re effectively buying a 3-year Treasury bill -- the current T-bill rate is 4.17% -- with the downside being that you’d have to purchase the shares in 2.5 years at $140 less $16.70, or a net price paid of $123.30. Over the past five years, JPM stock has traded below $123 on two occasions: Sept. 2022 and a good part of 2020.
While JPMorgan stock may fall to these levels at some point in the next 30 months, it’s also possible it will revisit its all-time highs above $170 in November 2021. In that case, you’d be left with $1,670 in income on your 100 shares.
For the most part, analysts like JPM stock. According to Barchart.com data, the 19 analysts covering its stock rate JPM as a Moderate Buy (4.26 out of 5) with a mean target price of $155.42.
Selling this put is a sneaky way to play a possible recession and a potential reversal of interest rates in 2024.
I guess we’ll see. Have an excellent weekend.
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.
