A large bet was made in call options of SOFI Technologies (SOFI) stock based on a report by Barchart. The trade is a bet that SOFI's profits will spike along with the stock with the restart of student loan repayments.
The trade, reported in Barchart's Unusual Stock Options Activity Report on June 14, shows that an investor paid 59 cents for 21,888 call options at the $16.00 strike price for expiration on Jan. 19, 2024. That is 219 days from now, indicating that the investor has a long-term view.
Moreover, today, June 14, SOFI stock is still below $10.00 at $9.84. So the investor has bought a strike price that is 62.6% more than today's price, indicating they think the stock will likely rise at least 70% or more by the end of the expiration period.
The truth is that once SOFI starts booking several quarters of higher profits, due to the return of student loan repayments, SOFI stock is likely to keep moving higher from here.
That will help boost this call option and make its price move even higher. So the investor may not have to wait until the end of the expiration period to reap a nice profit.
Where Things Stand With SOFI Stock
Analysts are now upgrading the stock, assuming that it will return to profitability in Q3. That is earlier than the prior expectations that the company would reach profits by Q4.
This has been pushing SOFI stock higher, making it rise almost 19% in the last 5 days alone. CNBC reported that BTIG is a top fintech pick and can surge 45% more based on the return of student loan repayments.
This is a result of the new debt limit deal signed by President Biden. The deal allows that within 60 days after the deal student loan repayments will begin. This will allow the company to make new interest income.
Last quarter the company's revenue rose 43% YoY and its quarterly net income loss improved to -$34.4 million from -$110 million in the prior year quarter. Student loans accounted for $525.3 million of its total $3.566 billion in loans as of the end of March 2023 or 14.7%.
As a result, if the company is able to make profits from these student loans, as well as from new loans that it can pick up, this could make the difference in terms of profitability for the quarter. As it stands analysts are still projecting negative net income on a per share basis for the year ending Dec. 2024. But this could change quickly in the next several quarters as student loan repayments begin.
Long-Term Calls in SOFI Stock
That's why this unusual call option trade is such a valuable bet for a long-term investor. It allows the investor to leverage the prospect that the return to profitability will generate much more gains for them in a call option trade.
For example, let's assume that the stock rises 70% in the next 200 days. That would push it over $16.00. The call option is likely to rise much more than 70% due to the fact that a call option will always have some extrinsic value over and above the intrinsic worth of the call option strike price less the spot price.
This way the investor in a long-term call option can effectively leverage their investment. In this case, the 21,888 call options that were bought cost about $1.291 million. If the stock rises to $16.00 in the 200 days, the call option is likely to rise to at least $4.00 to $5.00, effectively making it worth $20.00. This will provide the call option investor a return of 7 to 8x their initial investment, rather than just 70% should they have held the stock alone.
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.
