Given this is my last commentary about unusual options activity in 2023, I thought I'd go out with a bang.
What a year it's been in the markets. The Dow (up 13.8%), S&P 500 (25.08%), Nasdaq 100 (55.57%), and Russell 2000 (17.57%) are all in positive territory entering the last trading day of the year.
Of the 503 stocks in the S&P 500, roughly one-third will finish the year in negative territory. Yet, for most investors, 2023 will be a successful year, especially given it rebounded from a not-so-good year in 2022.
The Magnificent 7 delivered an average return of 113% in 2023, double the Nasdaq 100 and 4.5 times the S&P 500. Remove those from the equation; the year wasn’t quite as successful for the S&P 500.
Heading into 2024, I thought I’d cover three stocks with unusual options activity that investors can hold into 2025. All three are stocks worth owning for the long haul.
Happy New Year to all. We’ll see you on the other side!
Hershey (Put)
Hershey (HSY) had two unusually active put options on Thursday that expire in 2025.
They were the Jan. 17/2025 $260 and Jan. 17/2025 $280. The former’s volume-to-open-interest (Vol/OI) ratio was 5.85, while the latter’s was 5.00. Both have 385 days to expiration.
I’ll first explain why I like Hershey, the company, and its stock, and then I’ll return to the two options in question.
HSY stock was one of the 166 stocks in the S&P 500 that will finish in negative territory in 2023, down 18.2% year-to-date as I write this in early Friday trading.
In May, Hershey's stock traded at a 52-week and all-time high of $276.88. Down 33% in the eight months since it was most certainly due for a correction, at its 2023 high, it was trading at nearly 28x its 2024 earnings per share estimate of $9.97.
That’s considerably higher than its five-year average price-to-forward earnings multiple of 24.5. However, its current price of $185 is trading at just 18.6x its 2024 forward EPS estimate.
And that doesn’t consider any M&A activity it does in 2024 to strengthen its snacks business, which now accounts for over 10% of its overall revenue.
Lastly, Michele Buck is one of the finest CEOs in America. Since becoming CEO in March 2017, her focused strategy has paid big dividends for long-time shareholders.
Now, back to the options.
The $260 strike had a bid price of $73.50 yesterday, while the $280’s bid was $93.50. So, while the latter bid is $20 higher, the net price for both would be $186.50. Usually, I’d go with the lower strike, but in this instance, I think HSY makes an excellent long-term buy, so being $20 further in the money shouldn’t be a concern if you believe the shares will rise in 2024.
I do.
Advanced Micro Devices (Call)
Advanced Micro Devices (AMD) had quite a year in the markets, gaining 135% YTD. Of course, it doesn’t compare to Nvidia’s (NVDA) 248% return. Nonetheless, it's been a nice ride if you’ve owned AMD in 2023. I believe it can continue.
Over the past few years, I noticed that when Nvidia stock performs well as it has over the past 12-18 months, AMD tends to lag behind, and vice versa.
Regarding artificial intelligence (AI), Nvidia tends to get most of the positive press clippings. However, AMD CEO Lisa Su isn’t sitting idly by. In September, Su discussed the company’s newest chip, the MI300.
“It’s targeted at large language model training as well as large language model inference. Do we see opportunity? Yes. We see significant opportunity, and it’s not just in one place. The idea of the cloud guys are the only users, that’s not true. There’s going to be a lot of enterprise AI,” Su told The Verge editor-in-chief Nilay Patel in September.
The one thing I’ve always found about Lisa Su is that she underpromises and over-delivers.
The Jan. 17/2025 $250 call had a Vol/OI ratio of 1.32 yesterday. The ask price of $5.90 was a 2.4% down payment on these calls. With a delta of $0.19537, you can double your money on the call with a $30.20 move in its share price over the next 385 days.
The worst-case scenario is that the share price doesn’t increase, and you’re out $590. The best case is that it doubles in 2024, and you make $50 a share rather than $6.
Zillow Group (Call)
I have a funny feeling that residential real estate will heat up in 2024 as interest rates move lower due to subdued inflation.
Fannie Mae projects that home prices will rise by 2.8% in 2024; the Mortgage Bankers Association sees a 4.1% increase, while the National Association of Realtors predicts a mere 0.7% growth in the year ahead.
Again, it depends on the Federal Reserve’s interest rates and inflation stance. They’re on record saying they should come down in 2024. How far they fall will determine how hot or cold the housing market is.
In the end, a housing shortage in the U.S. won't be solved in the near term by lower interest rates and higher new home construction. It will take years for the supply to meet the existing demand.
Ultimately, however, the housing market should stabilize in 2024, and that’s good news for Zillow’s business.
Despite a 73% gain for Zillow stock in 2023, I could see another big move in 2024. It wouldn’t surprise me if it hit $100 by the end of 2024.
It just so happens that Zillow’s unusually active call option yesterday was the Jan. 17/2025 $85 strike with a $4.05 ask. That’s a down payment of 4.8%. While a tad high given the 385 days to expiration, your downside is protected by the 0.30549 delta, which suggests you can double your money on the call with a $13.26 (22.5%) move higher over the next 385 days from its $58.85 current share price.
I see the risk/reward proposition in your favor with this long-duration call.
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.
