Unusual Call Options Activity in Antero Resources Shows Bullish Outlook

An institutional investor decided today to make a large long-term bet on the long-term prospects of Antero Resources (AR), a natural gas exploration and production company. They did this by buying at-the-money (ATM) call options with almost a two-year expiration period.

Barchart's Unusual Stock Options Activity Report on Feb. 22 showed that the investor bought 529 call options at the $25.00 strike price for expiration on Jan. 17, 2025. That is 695 days from now, or 1.9 years from now (almost 23 months). This is also known as a LEAPs option (long-term equity anticipation security).

The price paid for the long-dated ATM call option in AR stock was $7.80 per contract. That is a little over 31% higher than the present stock price of $24.96 per share (actually 31.25%) and 31.2% over the strike price. In other words, the stock has to rise over 31% over the next 23 months for this call option to end up in-the-money.

The investor in this call option has paid $7.80 per contract, or $412,602 in total (i.e., $7.80 x 529 x 100). That allows them to control the equivalent of 52,900 shares in AR stock. 

Leverage Effect

I showed in a previous article on unusual call options activity in Fluor Corp (FLR) investors in long-dated calls gain significant advantages. One of these is that this provides them with significant leverage. For example, to buy 52,900 shares outright would have cost $1.32 million. So, in effect, they have a 3.2x leverage effect with the purchase of calls (i.e., $1.32 million/$0.4126 million).

Moreover, the call options investor knows full well that they may not have to wait 2 years to make a significant profit. For example, AR stock is down 12% YTD, and off 42% in the last six months from $43.00 per share.

So, assuming AR stock rises back up to $43.00, or up 68% from today's price, it's likely that the AT Jan. 17, 2025 call option will trade for slightly more than $18.00 per call (i.e, $43-$25.00). That is due to the extrinsic value that will be left in the call option premium. That could rise the premium price to $20 or so, which represents a return of 156% on the original $7.80 purchase.

Moreover, this long-term call investor could possibly reduce the cost of the long-dated call option by selling near-term out-of-the-money (OTM) put options. For example, the investor could sell $20.00 strike price puts that expire on April 21, 59 days from now, for 47 cents per put contract. This strike price is 20% below today's price, and that is not very likely to be exercised. In other words, if this trade can be repeated every 2 months for the next 23 months, i.e., 12 times, the investor could theoretically collect $5.64 per put contract. 

The issue is whether the investor is willing to do this. They would have to short 529 puts every 2 months. At 47 cents per contract, that would bring in $24,863 every 2 months. If this could be done 12 times over the next 2 years (assuming the investor continues to hold the call options) it will result in almost $300K in income ($298.356K). That covers 72% of the original $412.6K cost of the call options.

But, as I have shown above, the investor might not have to wait that long, assuming AR stock recovers to its former levels.

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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.