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Today there is unusually large activity in near-term expiry call options for Dell Technologies (DELL). This highlights the value of DELL stock, given its 20% dividend hike and possible increase in buybacks.
The Barchart Unusual Stock Options Activity Report today shows over 3,600 call options in the $130 strike price traded for expiration in 9 days on April 12. DELL stock is trading at $126.75 per share, so these calls are $3.25 out-of-the-money (OTM), or 2.56%. The premium was $1.45 on the bid side and $1.50 in the mid-price.
On the one hand, bullish investors may be betting that the stock will rise significantly in the next 9 days. Moreover, covered call investors get to receive a yield of 1.18% (i.e., $1.50/$126.75).
Alternatively, the short-sellers of these puts are making a bet that the stock will stay flat or rise less than 2.56%. They receive a yield of $1.45/$130, or 1.115% in this bet.
The number of calls that have been traded is over 32 times the prior outstanding number of contracts. That seems to imply that bullish investors may have been the initiators in this trade, although there is no guarantee this happened. Typically a large number of calls in a near-term expiry period is initiated by major trading desks.
What is going on here? The key may be in recent Dell management announcements benefiting their shareholders.
Dell Technologies Recent Shareholder Return Announcements
Recently on Feb. 29, the company announced a 20% hike in its regular quarterly dividend to $1.78, up from $1.48 per share. This came with its earnings release where it showed that its free cash flow (FCF) grew from $1.533 billion last year to over $5.7 billion in 2023.
Moreover, the company also said that it expects that going forward it will return over 80% of its adj. FCF to shareholders. That has major implications for the number of share repurchases that it will make going forward.
I discussed these developments in a recent March 27 GuruFocus article, “Dell Technologies' Dividend Hike, FCF Make the Stock Look Cheap.” I showed in the article that the company is likely to increase its buybacks significantly over the next year.
Moreover, I also discussed why DELL stock could be worth over $106 billion based on its powerful FCF. That is 25% more than its present $84.5 billion market cap. This implies that DELL stock could be worth at least $142 per share or so over the next year.
These could be reasons why DELL investors are piling into its call options today.
On the date of publication, Mark R. Hake, CFA 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.
