It’s midday on Thursday as I write this.
The S&P 500 is down 0.73% on the day. If it holds, it will be the index's ninth down day in the past 11. With three trading days left in October after today, the index is down 3.0% for the month, not quite as bad as the 4.87% it lost in September, but one awful day before next Wednesday could put it over the top.
Meta Platforms (META) is why today’s dip into negative territory—something about disappointing earnings guidance.
Well, I’m here to shine a little on your day with three possible money makers from today’s unusually active options expiring on April 19/2024.
According to Barchart.com data, there are 359 options with Vol/OI ratios of 1.25 or greater. Of those, six with unusual options activity expire in 176 days.
Here are my three favorites.
PayPal
PayPal (PYPL) is having a brutal year. Its shares are down 31% with two months to go in 2023. Its shares are pennies away from a 52-week low and haven’t traded this low since May 2017.
PayPal can’t catch a break.
On Wednesday, French-based payments company Worldline (WRDLY) cut its full-year guidance due to a slowdown in revenue and profitability in several key markets. PYPL lost a couple of dollars on the news. It’s doing better today, down less than 1%.
The lousy news boiled down to a 250 basis point reduction in Worldine’s 2023 organic revenue growth from 9% at the midpoint to 6.5%.
As best I can tell, virtually all of Worldline’s revenue is from Europe. Paypal generates just 18% of its revenue from Europe. With today’s announcement of 4.9% annual GDP growth in the U.S. in the third quarter, PayPal clearly shouldn’t be worried about its situation here at home.
PayPal reports Q3 2023 on Nov. 1. The analyst estimate for per-share earnings is $1.23. For the year, it’s $4.95. Who knows what it will report, but assuming it hits on the nose, it’s trading at just 10.4x 2023 earnings.
In 2017, when it last traded this low, it had a forward P/E of 32.5, 3x its current multiple.
Okay, assuming you also think it’s absurdly cheap, you could sell the April 19/2024 $47.50 put with a current bid of $3.85. That’s an annualized yield of 15.6% and a net price of $43.65.
It’s possible that PYPL shares could fall to $43.65 in the next six months. But is it likely? I don’t think so. This is a very interesting income play out of the money at the moment.
Texas Instruments
I’m not much of a tech guy, but Texas Instruments (TXN) is one of my favorites because of its focus on free cash flow.
On Tuesday, the semiconductor company reported Q3 2023 earnings after the markets closed. They were light for investors' liking regarding the past quarter and its guidance for the rest of the year. Revenue in the quarter was down 14%, while it saw a high-single-digit decline in Q4 2023 sales.
As the Motley Fool points out, it’s ramping up spending when growth is slowing. That’s put a dent in its free cash flow generation. In the trailing 12 months ended Sept. 30, its free cash flow was $1.65 billion, down from $5.92 billion a year ago.
However, as CFO Rafael Lizardi said in the conference call, its spending for business 10-15 years down the road, it can’t be concerned about the current slowdown. Invest or die. I couldn’t agree more. It just means it won’t buy back as many shares as it usually does. So be it.
Texas Instruments is a well-run company. They’ll get through this.
The April 19/2024 $180 call has an ask price of $1.41 or 0.8% of the strike. That’s a very low down payment for 100 TXN shares to buy in six months. With a delta of 0.12084, you can double your money on the call with a $11.67 increase in its share price without actually exercising your right in April. That’s well below the $180 strike.
The risk/reward is titled heavily in your favor on this one.
Mattel
As I finish my article with my third and final option, I’m noticing that there are now 11 options expiring on April 19 with unusual options activity. However, I will stay with Mattel (MAT) as initially planned.
Mattel is up nearly 4% in 2023, unlike the other two stocks. It’s come back nicely since the March 2020 correction when it traded below $8. However, it’s stalled in the past year.
Mattel lowered its Q4 and full-year 2023 toy sales outlook this morning, knocking MAT shares lower by more than 7%, wiping out a good run in the past six months.
The company now sees sales declining by 14% at the mid-point of its guidance in 2023, down from a 4.5% decline from its previous outlook. Essentially, its strong third quarter is being overshadowed by what’s expected to be a weak holiday season.
Okay, it now expects full-year EPS of $1.20 at the midpoint, five cents better than its previous guidance on lower sales. Its EPS will be slightly down from $1.25 in 2022.
There are two call options with unusual options activity expiring in 176 days. A $22 strike with a $0.90 ask price and a $26 strike with a $0.30 ask. That’s a down payment of 4.1% for the former and a 1.4% down payment for the latter.
That makes sense, given the latter has to move nearly 40% higher based on its current share price of $18.62 over the next six months to get to the $26 strike. The former only needs to rise by 18% over the same period.
So, the $26 call option can double in value with a $3.08 increase in its share price, compared to a $2.96 increase for the $22 call.
If you want to own this stock for just 12 cents more appreciation, the $22 strike makes more sense.
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.
