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A large volume of out-of-the-money (OTM) put options on Core Scientific Inc. (CORZ) suggests investors may be bullish following the data center's May 6 Q1 earnings release. These puts yield 20%+ over 6 months in a 12.5% OTM short-put play.
CORZ is trading at $28.61 in midday trading today, up 1.9%, after rising +28% from $22.36 on May 7, the day after its earnings results.
Investors seem to be taking advantage of very high put option premiums, even for deep out-of-the-money (OTM) strike prices in longer-dated expiry periods. This can be seen in today's Barchart Unusual Stock Options Activity Report.
It shows that the volume of puts at the $25.00 strike price expiring Dec. 18, 2026, 12.5% below today's price, is over 41 times the prior number of put contracts outstanding (i.e., open interest, or OI).
Moreover, the midpoint premium for this put option contract is $5.05, which can provide short-sellers an immediate yield of 20.2% (i.e., $5.05/$25.00).
In other words, these investors post collateral of $2,500 per put and then enter an order to “Sell to Open” 1 put at this strike price. The account will then immediately receive $505. So, the immediate yield is $505/$2,500, or 20.2%.
That works out to a per-month yield of 3.367% (i.e., 20.2% / 6 mo), which is quite attractive to value investors.
In addition, even if CORZ falls to $25.00 within the next 184 days, and the account is assigned to buy 100 shares at $25.00, the net breakeven point is much lower:
$25.00 - $5.05 = $19.95 breakeven
That is over 30% below today's price (i.e., $19.95/$28/61 -1 = -.303, or -30.3%). So, CORZ value investors believe CORZ will eventually become profitable and generate strong cash flow. They may have a potentially lower buy-in point.
Buyers of these puts obviously believe that CORZ will continue to make losses and the stock will fall. Let's look at what might occur and CORZ's fair market value (FMV).
Strong Cash Flow Forecast
Austin-based Core Scientific provides data centers and infrastructure for data mining and workload facilities for machine learning and AI companies. Last quarter, it reported a GAAP net income loss. However, after a huge increase in revenue, the company generated positive EBITDA (earnings before interest, taxes, depreciation, and amortization).
Moreover, it generated positive cash flow from operations (CFFO), although free cash flow (FCF) was negative due to higher capex. Its Q1 CFFO margin was 217% ($249.9m/$115.2m revenue), although this is expected to drop as revenue rises.
For example, analysts now forecast that revenue will rise from $619.9m forecast this year to $1.06 billion next year. So, assuming its CFFO margin is 33%, it could mean Core Scientific's cash flow from operations will be $350 million next year (i.e., $1,060m x 0.33).
Assuming the market eventually gives the stock a 3.33% cash flow yield (i.e., a 30x CF multiple), the stock's fair market value (FMV) will be at least:
$350m x 30 = $10.5 billion
That is 15.3% above Core Scientific's market cap today of $9.11 billion, according to Yahoo! Finance's calculation.
In other words, the price target for CORZ for the next 12 months (NTM) is $33 per share ($28.61 x 1.153).
Issues With This Valuation
That could potentially explain why investors are willing to sell these out-of-the-money puts to buyers for the next 6 months.
Moreover, other analysts have similar valuations. For example, Yahoo! Finance reports that the average price target (PT) for 18 analysts is $32.57. Similarly, Barchart's mean analyst survey PT is $30.38.
On the other hand, there are huge risks in this valuation. For one, there is no clear evidence that Core Scientific will generate positive free cash flow (FCF), given its huge capex. Second, the 30x multiple for operating cash flow assumes the company will eventually generate positive FCF.
So, there are huge risks with shorting these OTM puts. Investors should be very careful in copying this trade. It may indeed make sense to short an even deeper out-of-the-money (OTM) strike price.
For example, the $20.00 put option expiring Dec. 18, i.e., 30% below today's price, has a $2.37 midpoint premium. That still provides an 11.85% yield (i.e., $2.37/$20.00) over the next 6 months, or an expected annualized return of 23.7%, assuming it can be repeated twice a year.
Moreover, that strike price has a much lower delta ratio, 18%, compared to 29% for the $25.00 strike price. That implies a much lower chance of having the account assigned to buy shares at the strike price.
The bottom line is that CORZ put options can provide short sellers with an attractive potential buy-in point.
