In the short book “War Is a Racket,” author Smedley D. Butler called to attention the cynical business of industrialists profiting from mass human conflicts. While circumstances have changed dramatically since the original publishing date of 1935, the tailwind that can materialize from extended military campaigns represents an unavoidable reality. Case in point is drone specialist AeroVironment (AVAV).
Rising to prominence in large part because of its Switchblade drone, the unmanned aerial weapons system played an integral role for Ukrainian forces as they repelled the initial wave of invading Russian troops. Further, it will likely continue to be an indispensable tool as Ukraine grinds forward in its counteroffensive.
In other words, it’s probable that most Ukrainians themselves look at AeroVironment with a sense of appreciation. For them, the war is not just a matter of protecting democracy but of their very existence. So, please do not misinterpret this article as a criticism of AeroVironment.
Rather, it’s just pointing out the cynical backdrop that the company has proven itself on the battlefield. And with that, AVAV stock represents one of the hottest ideas in the market today.
As Barchart’s Will Ashworth pointed out, AeroVironment reported its fiscal first quarter of 2024 earnings report on Sept. 5. “Its top line grew 40% to $152.3 million, while its operating income was $26.4 million, a much better result than its $3.3 million loss a year earlier. It finished the quarter with a record funded backlog of $540 million, 27% higher than Q4 2023.”
Still, Ashworth prefers Consolidated Water (CWCO) – a Cayman Island-based water company – as the better buy based on financial comparisons as well as a strong narrative. Still, the smart money seems intrigued with AVAV stock.
Volatility ‘Smiles’ on AVAV Stock
Following the close of the Sept. 6 session, AVAV stock represented one of the top highlights for unusual stock options activity based on changes in volume. Specifically, total volume reached 9,496 contracts against open interest of 9,079. The difference between the Wednesday session volume and the trailing one-month average metric came out to 1,001.62%.
Looking at the transactional view, call volume hit 5,257 contracts against put volume of 4,239 contracts. This pairing yielded a put/call volume ratio of 0.81. Per Barchart, the put/call open interest ratio sits slightly lower at 0.72.
While intriguing, the real star of the show in terms of options rumbling may be AVAV’s volatility smile or its implied volatility (IV) printed at various strike prices. While IV doesn’t necessarily offer a directional insight, it demonstrates heightened trading activity at certain strike prices over others.
Immediately, one takeaway is that AVAV stock features a “smile,” where IV spikes at opposite ends of the strike-price spectrum while hitting a low near the middle of the range. Generally speaking, the rise in IV as the strike price moves deep in the money (ITM) – assuming from the perspective of a call option holder – reflects possible risk mitigation among traders; that is, they recognize the risk of extreme price volatility.
On the other hand, rising IV for strike prices out of the money (OTM) indicates that simultaneously, traders may anticipate longer-term upside potential. However, what’s conspicuous about AVAV stock and its volatility smile is that the “velocity” of the IV between strike prices $115 to $80 is flat. Only from $80 to $45 does IV accelerate.
Such a framework may indicate that traders anticipate a pattern of pricing predictability down to $80 (AVAV stock closed at $115.05 in the open market Wednesday). However, the sharp spike in IV may suggest leeriness about extreme volatility; thus traders may be hedging their bets.
Still, what’s truly notable is that the rise in IV from strike $115 to $165 is gradual, almost linear. While it’s impossible to say with absolute authority, traders may appreciate the credibility of AeroVironment’s fundamentals. After all, business is good and the smart money recognizes the potential here.
Should You Buy AeroVironment?
So, with all the math and data out of the way, we’re down to the bottom-line question: should you buy AVAV stock? While recognizing the risks associated with buying a security that just experienced a massive surge higher, the smart money appears enthused about AeroVironment. Since they have the resources and acumen that arguably most retail investors do not, their activity carries precedence.
For example, when you consider the top five most unusual AVAV options transactions for the Sept. 6 session, most of them are for OTM calls:
Of course, deciphering puts and calls is a lot harder than calling balls and strikes. However, in this case, I believe you can read the print at face value. AeroVironment just released strong earnings results and it anticipates greater demand in the future. Even Ashworth recognized that warfare moving forward may be all about drones and little to nothing else.
True, you want to approach this setup intelligently. The smart money recognizes the downside risk based on their possible hedging behavior. Nevertheless, if you’re a patient investor, AVAV stock seems a reasonable long-term wager.
On the date of publication, Josh Enomoto 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.
