Who said the consumer has stopped spending?
The shoppers at the Gap (GPS) kept spending in the third quarter. It reported earnings yesterday after the markets closed. Its revenue and earnings both easily beat analyst estimates. As a result, Gap shares are up more than 30% in Friday morning trading.
Wall Street looks to close the week in positive territory, delivering a third consecutive winning week in the markets. The S&P 500 was down and out in October. With the November gains, it’s up nearly 18%. A Santa Claus rally could put it over 20% for the third time in the past five years.
A guy can dream, can’t he?
Anyway, I’m on tap today to discuss unusual options activity. I’ve scanned Thursday’s action and come up with four call options that each had Vol/OI (Volume to Open Interest) ratios of 10 or more. I’ll rate them from best to worst.
Have an excellent weekend!
Cisco
Cisco’s (CSCO) stock did not have a good day on Thursday, closing down nearly 10% after the tech company reported good quarterly earnings. Still, it provided the street with Q2 2024 projections that fall well short of analyst estimates.
On the top line, it expects $12.8 billion in revenue at the top end of its outlook, $1.4 billion shy of the consensus. On the bottom line, Cisco’s calling for 83 cents a share at the midpoint of its guidance, 16 cents lower than the consensus.
The lower guidance results from customers slowing their future orders to work through inventory backlogs. The company says it’s not anything related to economic issues.
So, there could be an opportunity shaping up here.
The call option that caught my attention from yesterday is the Jan. 16/2026 $40 strike. With 791 days to expiration (113 weeks from now), it’s hard to know where the share price will be. The Vol/OI ratio on the call was 10.15.
The ask price of $11.70 is a 29% down payment on CSCO stock. Based on a net price of $51.70, it only needs to appreciate 8% over the next two-plus years to be in the money. In the meantime, with a delta of 0.74242, you’ve got a decent chance to make some money on the call should you sell before expiration.
The call makes sense if you’re bullish on Cisco in the long haul.
Bristol-Myers Squibb
I’m interested in the Bristol-Myers Squibb (BMY) Jan. 17/2025 $52.50 call with 427 days to expiration. The ask is $4.65, a 9% down payment on BMY stock. Anytime you can get a down payment of less than 10% for a call expiring in more than a year, you’re getting a reasonable price.
However, there is a reason for that.
Investors aren’t convinced the maker of the immuno-oncology drug Opdivo has much growth in the tank. Over the past five years, its shares have lost nearly 4% of their value, significantly worse than the 71% return for the S&P 500.
Analysts seem to need more convincing, too. Of the 28 that cover BMY, only 10 rate it Outperform or an outright Buy. However, despite more than half (16) of the analysts sitting on the fence with a Hold rating, they’ve given it a target price of $60, nearly 20% higher than where it’s currently trading.
More importantly, that’s a 12-month target. Do you see where I’m going with this?
The delta is 0.49526. You can double your money by selling the option before expiry if it increases by $9.39 and by 50% if its price rises by $4.69. The $60 target says it’s more than doable.
Anglogold Ashanti
The South African-based gold miner’s call expires in 427 days on Jan. 17/2025. AngloGold Ashanti’s (AU) ask price was $2.10, a 9.5% down payment on the $22 strike. Its Vol/OI ratio was high at 22.76, putting it in the top 100 unusually active call options for Thursday.
Based on its closing price of $17.12 and a delta of 0.42787, you’ll double your money on your call if its share price increases by $4.91 (29%) over the next 14 months. Whereas, if your only goal is to exercise the call in 2025, you need it to increase by 41% over the same period.
On Nov. 9, the company reaffirmed its full-year production guidance for 2023 due to improved production in the third quarter. The company produced 673,000 ounces of gold in Q3 2023, with Africa generating 59% of the production, followed by Australia (21%) and the Americas (20%).
For all of 2023, it expects to produce 2.53 million ounces of gold at the midpoint of its guidance, with an all-in-sustaining cost of $1,428 an ounce. At current prices, just under $2,000 an ounce, that’s a $1.4 billion profit after expenses.
Marathon Oil
I'm not a big oil and gas person, but I know that Marathon Oil (MRO) is a big player in the energy sector. Interestingly, its shares have gained nearly 63% over the past five years, 25% points better than Exxon Mobil (XOM) and more than double Chevron (CVX).
That’s impressive.
Part of the reason it’s been able to outperform the world’s largest oil and gas producers over the past five years is by sticking to its criteria for making acquisitions. Rather than blow $50 or $60 billion on an acquisition, it’s ensuring any prospective target meets its criteria.
“Any transaction must meet our tried and true principles of financial and return of cash accretion, industrial logic within our existing basins, inventory life extension and no harm to our investment grade balance sheet,” stated CEO Lee Tillman in its Q3 2023 earnings call.
In 2022, it was able to acquire 130,000 net acres right beside its acreage in the Eagle Ford shale basin in Texas. It paid $3 billion, one-twentieth of what XOM just paid.
Capital allocation is one of the top jobs of a CEO. It appears Tillman is excellent at this part of the job.
The call option with the shortest duration at 217 days, the June 21/2024 $31 strike has an ask of $0.90. That’s a down payment of less than 3%. Sure, its share price has to appreciate 29% over the next 31 weeks to be in the money, but $90 per call is hardly a hardship.
Not to mention, MRO only has to increase by $3.90 for you to double the money on your call before expiration. That’s just 16%.
The Verdict
I think it’s fair to say people use options for various reasons. Some do it to gain income. Others are looking to hedge their long or short bets. Others want to use them to buy their favorite stocks at a reasonable price.
So, it’s very subjective for me to rate these four call options because I know if I asked 10 others to do the same, I’d probably get 10 much different answers. But I digress.
The call with the least amount of risk is often the best bet.
For me, that’s unquestionably MRO. The oil and gas business might not be on fire as it was in June 2022 when a barrel of West Texas Intermediate was over $118, but $75 is much healthier than when it was trading for less than $0 in 2020. The complete transition to something other than fossil fuels is still decades away.
Next up would be Anglogold Ashanti. I have three reasons for making it the second-best call.
First, of the three remaining, it has the lowest upfront outlay of $210. While you don’t have to exercise your right to buy 100 shares, if you don’t sell the option before expiry and don’t exercise, you lose that money. So, to me, that’s a significant concern.
Secondly, with two major wars going on, I can’t see gold prices falling into a funk anytime soon. Some are calling for $3,000 an ounce in 2024.
Lastly, should gold continue its move higher in 2024, the likelihood of you being able to at least sell your call for a profit remains very much in play.
Next, I’ll go with BMY because analysts' $60 target price suggests you ought to be able to make some money on your one-year-plus bet.
Lastly, Cisco is very attractive because the net price of $51.70 is only 8% higher than the current share price.
However, before you jump in, consider that the premium of $1,170 is $405 more than the other three combined. You’re paying a higher premium because of the days to expiration but also because it’s a tech stock.
Buying options so far out isn’t necessarily a bad idea. It’s just that so many things can happen between now and then, especially in tech, that the risk/reward doesn’t seem as attractive as some of the others.
But as I said, my vision of beauty might differ from yours.
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.
