As is the case every Friday, this installment examining unusual options activity looks at three possible opportunities.
Sometimes, I pick a sector or industry to focus on. Other times, like I’ll do today, I’m selecting three options to buy/sell on Friday that were unusually active yesterday, finishing in the top 100.
In this iteration, I’m leaning on risk, in a Goldilocks-like version, with options ranging from mild (low-risk) to medium (middle-of-the-road risk) to hot (high-risk).
I hope you like them.
Mild (low-risk) = Microsoft
It’s been quite a week for Microsoft (MSFT).
First, it reported good, if not great, Q3 2023 earnings. Then it found out that U.K. regulators gave the thumbs down to Microsoft’s proposed $69 billion acquisition of Activision Blizzard (ATVI). Regulators felt it would give Microsoft too much power over the gaming industry. So investors were left to speculate whether there was any chance for an appeal of the decision.
As I write this late morning, Microsoft stock is up 7% on the week. Given the bad news, that’s a victory for shareholders. The future will bring what the future will bring. We know that CEO Satya Nadella is going all-in on artificial intelligence.
“The world's most advanced AI models are coming together with the world's most universal user interface - natural language - to create a new era of computing,” Satya Nadella, Microsoft’s CEO, said in its Q3 2023 press release. “Across the Microsoft Cloud, we are the platform of choice to help customers get the most value out of their digital spend and innovate for this next generation of AI.”
CEO Satya Nadella has done a fantastic job turning around Microsoft since taking the top job in 2014. I have no doubt he’ll deliver on the company’s AI ambitions.
What’s the options play?
I like selling the May 5 $305 puts. With seven days to expiration, the premium income was $4.25, a 1.4% yield on Thursday’s closing price of $304.83. That’s an annualized yield of 73%. I’ll take that every day of the week and twice on Sundays.
The bottom line, you may or may not be forced to buy at $305. If it’s put to you, you’re getting MSFT for $300.75. Long-term, you should do fine at that entry point.
Medium (middle-of-the-road risk) = Roku
Roku (ROKU) stock is up 37% year-to-date but down nearly 5% over the past week. Star portfolio manager Cathie Wood bought Roku stock on Thursday after the video streaming platform reported better-than-expected Q1 2023 earnings.
The good news from its earnings report is that it generated revenue of $741 million, $7 million higher than a year ago and $33 million above analyst expectations. However, on the bottom line, it lost $1.38 a share, nine cents lower than the consensus estimate.
“Overall, smart-TV unit sales in the U.S. were resilient in Q1, driven in part by lower TV panel and freight costs and consumer spend of income tax refunds,” MarketWatch reported the company’s comments from its first quarter shareholder letter. “Roku benefited from these trends along with a consumer focus on value, particularly in a difficult macro environment.”
I’ve been a fan of Roku CEO Anthony Wood for several years. I believe he’s building a platform that will ultimately be highly profitable.
Most importantly, it finished with 71.6 million active accounts, 500,000 higher than analyst estimates and 1.6 million higher than in Q4 2022. At the same time, streaming hours increased to 25.1 billion, 0.2 billion higher than the previous quarter and 300 million higher than the analyst estimate.
When these two numbers are up, all’s good with the world.
What’s the options play?
I'm looking at buying the June 16 $40 call. It had an ask price of $17.90 on Thursday. Add that to the strike, and your price paid if you exercise your right to buy would be $57.90, 89 cents higher than the closing price of $57.01.
However, with a delta of 0.92743, you would double your money on the ask paid if its shares increase by $19.30, or 33.9%. So, you could still make money on this bet without buying ROKU shares.
Hot (high-risk) = AMC Entertainment Holdings
I am the last person that would buy AMC Entertainment Holdings (NYSE:AMC) stock. I wrote about AMC for Barchart.com in March. I argued that its financial condition was in terrible shape and likely to worsen. It’s down 8% since then.
AMC stock might not be as low as in 2021, but it's still very much in penny-stock territory where it should be.
AMC’s share price has rallied some in the past month as reports surfaced that Amazon (AMZN) was interested in buying the movie theater chain. In addition, sources indicated that Jeff Bezos had pushed the company’s M&A people to explore an acquisition. With MGM Studios in the fold, I guess it makes some sense. Once upon a time, the movie studios owned their theater chains. I think we’ll see soon enough.
However, Wedbush Securities summed up why it’s probably not going to happen, stating, “We do not think that AMC is a likely acquisition target in general given its massive debt and inflated valuation,” Reuters reported the investment firm's comments about the speculation.
What’s the options play?
It is to sell the Aug. 18 $4 puts. The premium income of $1.62 is an annualized yield of 98%. While it’s possible that the share price could fall below $4 in the next 112 days, and you’d be forced to buy the shares, your ultimate cost would be $2.38. Even in 2021, it rarely traded that low.
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.
