Thank goodness it’s Friday.
I don't know about you, but I’m looking forward to Sunday’s Lions/Vikings game. It should be the best game on the week seven NFL schedule. Although Canadian, my mom’s parents were from Minnesota, so I’ll be rooting for the Vikings. That said, the Lions are an excellent team with a great coach.
But I digress.
On Sept. 6, I unwittingly started a tradition of writing about three unusually active call options to buy for $100. About six weeks later, I thought I’d review the three selections from September and make three more for October. Only the $100 limit was too confining, so I upped it to $500.
Have an excellent weekend.
The Good and Bad From September
The three stocks were Palantir Technologies (PLTR), Ares Capital (ARCC) and VF Corp. (VFC). You couldn’t get three different businesses if you tried. Palantir, of course, is making a big play in AI. At the same time, Ares Capital is America’s largest BDC (business development company), and VF Corp. is the once mighty, now struggling to return to form, apparel conglomerate.
First up is Palantir. Its shares have gained 39% since the article was published. The stock’s closing price on Sept. 5 was $30.16. The closing price on Sept. 12, the day before expiration, was $34.91, a gain of $4.75.
Based on the delta of 0.11291, the ask price on the 12th would have been around $0.69 ($4.75 times 0.11291 = $0.536 + $0.15). Selling before expiration would have netted $54, or an annualized return of 154%.
Up second is Ares Capital. Its shares have gained 6% since the article was published. You don’t have to be a rocket scientist to know this one did not make money.
The stock’s closing price on Sept. 5 was $20.86. The closing price on Oct. 17 (it expires today) was $21.66, a gain of $0.80. The current ask price of the Oct. 18 $21 call about 90 minutes into Friday trading is $0.65. You might be able to sell the call and double your money. The ask price at yesterday’s close was $0.65. A $45 gain is an annualized return of 19%.
The last of the three is VF. Its shares have rallied in the past six months, up 57%, as turnaround specialist and CEO Bracken Darrell worked his magic.
How’s it done since the article? The stock’s closing price on Sept. 5 was $17.84. The closing price on Sept. 12 was $17.24, expiring worthless, for a $26 loss. I’ll be looking for another VFC call. He’s the right CEO for the job.
The three calls cost $62 and delivered approximately $134 for an absolute gain of $72 (116%). That’s an annualized return of nearly 1,000%.
While I'm tempted to ride Palantir for more gains -- its Dec. 20 $65 call had the second-highest Vol/OI (open interest) ratio on Thursday at 111.19 -- I’ll go with three original ideas from three different sectors.
Nu Holdings
The first is Nu Holdings (NU), a Brazilian fintech and digital bank. Yesterday, it had the sixth-highest Vol/OI ratio at 43.10.
Barron’s recently discussed how Warren Buffett and Cathie Wood, the infamous tech portfolio manager, own NU stock.
“Though it might not be the typical Buffett holding—and may have been purchased by one of his deputies— Berkshire Hathaway probably ‘sees the disruption to the traditional banking model that Nubank has pioneered in Latin America,’ says Ramiz Chelat, a portfolio manager for Vontobel’s Quality Growth Boutique.
In April, I recommended a protective collar for existing owners of NU stock. It is the two options expiring on Nov. 15. A protective collar is meant to protect your gains on the stock.
Its share price closed April 19 at $10.48. Although it had a terrible July, it’s up 37% in the six months since.
The put you bought, which cost you $58, will expire out of the money. The covered call is currently in the money, which means you’ll get to keep the $44 in premium income, but you’ll have to sell your 100 shares. They’re trading at $14.31.
Let’s say they go up another $1 in the next month; your trade cost would be $145 [Put $58 less Call $44 less 100 shares times $1.31 ($15.31 less $14 strike)]. However, you’ve gained $352 [($14 less $10.48) times 100] for a net profit of $207.
Of course, you’ve had to sell the 100 shares of NU in the process. The Aug. 15 $17 strike gets you back in for a 7.2% down payment of $123. The odds are good it gets to $17 in 302 days.
Macy’s
You probably think I've lost my mind recommending Macy's (M), the department store that continues to struggle and has for many years. However, it had the highest Vol/OI ratio for call options yesterday at 155.20.
Looking at the trading of the $17.50 strike, there was only one trade of over 500. The call expires next Friday. The ask is $0.21 for a 1.2% down payment on M shares. You can double your money by selling before expiry if its shares gain 89 cents (5.5%) over five trading days next week.
The company continues to open smaller Bloomie’s stores, providing customers with more curated clothing collections. Despite all the doom and gloom, analysts still expect it to earn $2.72 a share in fiscal 2024 (January year-end). It trades at less than 6x this estimate. You can’t get much lower than this. Deep-value investors must be buying.
Yesterday, Macy’s overall options volume was 79,205. A day earlier, it was 64,954. The last time it hit either of these numbers was Aug. 21. So, its volume the previous two days is in the top 10 over the past year.
At $21, your downside is low.
Yum China Holdings
Yum China Holdings (YUMC), the operator of KFC, Pizza Hut, Taco Bell, and several locally developed restaurant concepts, had just one unusually active call option yesterday. Still, its Vol/OI ratio was in double digits at 10.88, comfortably within the top 100.
In early October, it made my list of three undervalued stocks I like whose options were unusually active and trading well below fair value, according to Morningstar.
“Yum China Holdings has a fair value estimate of $76 and a P/FV of 0.60. Between the pandemic and a slowdown in Chinese consumer spending, its stock’s been pounded mercilessly in recent years, hitting a 52-week low of $28.50 in early August,” I wrote on October 3.
The Nov. 15 $60 call was the best option. The down payment was a reasonable 3.5%, and you could double your money by selling the call before expiry with a 14% gain.
In fairness, I did say that its 50% gain in the previous month meant the odds of maintaining its momentum weren’t high. The shares have retreated 11% in the two weeks since.
But I still like its chances.
With that in mind, the July 18/2025 $55 call looks like a winner. The 3.5% down payment is the same as the one from my October article, but the strike is $5 less, and the duration is 6x longer at 274 days.
In addition, it only has to appreciate by $6.95 (16%) for you to double your money by selling before next July.
If you’re a value investor, the risk/reward is stacked in your favor.
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.
