The market got all hot and bothered yesterday after President Trump's big win. The S&P 500 gained 2.5% on Wednesday, while the Dow was up 3.6%. Investors, rightly or wrongly, feel a Trump presidency will lead to greater economic growth.
Who knows if that will be the case? Democratic administrations have often had better economic numbers than their Republican counterparts, but the market sees what it wants to see. Four years from now, we’ll find out if investors were right.
In the meantime, outdoor products manufacturer Yeti Holdings (YETI) had five unusually active options in Wednesday’s trading, including a call and put in the top 25, with Vol/OI ratios of 26.80 and 26.76, respectively.
Looking at Yeti’s five unusually active options from yesterday, they all screamed for a strangle strategy. Here’s why.
The Options in Question
Before considering the pros and cons of owning YETI stock, here are the five options.
“The long strangle strategy anticipates volatility to rise and the underlying security to move significantly in either direction. The long strangle option strategy involves buying a call option and buying a put option at a lower strike price,” states Yeti’s Long Strangle page.
So, you’ve got three potential long strangles based on the five options from above.
1) Dec. 20 $35 call and Dec. 20 $30 put
2) Nov. 15 $37.50 call and Nov. 15 $32.50 put
3) Nov. 15 $35 call and Nov. 15 $32.50 put
The first strangle had a total volume of 6,775 between the two, 9,249 for the second one, and 7,202 for the third. Yeti’s total options volume yesterday was 28,907, nearly 9x the 30-day average. It was by far the most volume it has had in the past three months.
The P/C Vol and P/C OI ratios were well over 1.0, a bearish sign from investors, suggesting that the strangles used were short rather than long.
Let’s quickly understand the pros and cons of owning YETI stock.
The Pros of Owning Yeti Holdings
The company reported its Q3 2024 results this morning before the markets opened.
They were impressive, with net sales growth of 10% over last year and adjusted earnings per share increasing by 18%. Revenues were driven higher by double-digit cooler sales and a 30% increase in sales outside the U.S.
Its adjusted earnings per share increased by 18% to $0.71. As a result, it updated its earnings per share outlook for 2024 to $2.65, at the high end of its previous guidance between $2.61 and $2.65. On the top line, it expects 9% sales growth over 2023. It trades at just 14.6x this estimate.
Analysts are lukewarm about its stock. Of the 17 who cover it, six rate it a Buy, with a median target price of $45, about 20% higher than where it's currently traded. The company’s third-quarter results beat on both the top and bottom lines.
The aggressive investor should be intrigued by the value play here, given its shares are down 24% in 2024.
The Cons of Owning YETI Stock
If you’ve owned Yeti’s stock since the end of 2022, you’ve lost money on your investment. If you bought at the all-time high of $108.82 in November 2021 and still hold, you’re down 65% over 36 months.
There is an argument to be made that Yeti is an example of a good company with a bad stock that will never return to the good old days during the pandemic when more people headed outdoors.
Another argument bears might make is that margins aren’t nearly as robust as they were two or three years ago. For example, its gross margin for the trailing 12 months ended Sept. 38, according to S&P Global Market Intelligence, was 58.3%, five basis points higher than in fiscal 2021. However, its EBIT margin at the end of September was 14.5%, 500 basis points lower than in 2021.
Is it possible that they’ll never get back to those halcyon days? Maybe.
The Strangle to Make
In the case of the long strangle, your potential loss is maxed at the cost of the two options.
The Dec. 20 example would have been $4.25 or 5.9% of its Wednesday closing price of $36.13. The Nov. 15 $37.50 maximum loss would have been $2.90, or 4.0% of its share price, while the Nov. 15 $35 maximum loss would have been $4.40, or 6.1%.
With the first one, you make money if the share price exceeds $39.25 or below $25.75 at expiration. The second would be above $40.40 and below $29.60, while the third is above $39.40 and below $28.10.
I’m always keen to limit my cash outlay with options. However, thanks to the earnings report, I’m moderately bullish about Yeti’s near-term future through the end of the year, so I’d go with the Dec. 20 strangle and the additional month to get over $39.25.
To do the same strangle today would cost you $4.55, 30 cents higher than yesterday. I still think it’s a reasonable bet if you’re bullish about the company’s future earnings. As I write this at noon on Thursday, YETI stock is up nearly 8% on the day.
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.
