The Time to Strike Is Now on These 3 Unusually Active Options

The markets are headed lower in Thursday morning trading thanks to Federal Reserve Chairman Jerome Powell hiking interest rates by 50 basis points. More importantly, the Fed indicated another 75 basis points of increases is coming in 2023. 

With several critical indicators set to be released today, trading in the markets could be very volatile as investors try to figure out what it all means. 

In the meantime, I’m on tap to discuss unusual options activity from recent trading.

On Wednesday’s trading, three call options with strike prices below $10 caught my attention. All three operate in different businesses but experienced above-average volume relative to open interest on the day. 

A Little International Flavor

The first call on my list is the Petrobras (PBR) April 21/2023 contract with a $9.00 strike price.

Petrobras is one of the largest integrated oil and gas companies in Latin America, a region I’m fascinated by. The potential for growth across so many sectors is a given.

However, news surfaced that Brazil plans to change legislation to reduce the protections made available against political interference at state-controlled companies. As a result, Brazil’s new administration under Luiz Inacio Lula da Silva could insert politicians into managerial roles at Petrobras. 

“‘The speed at which the change took place did catch us by surprise,’ Banco BTG Pactual SA analysts Pedro Soares and Thiago Duarte wrote in a note. ‘This is indisputably negative for Petrobras (and other Brazilian state-owned enterprises) and eliminates one of the main mechanisms of defense from political influence at the company,” Bloomberg reported. 

As a result of the news, PBR stock lost nearly 10% in Wednesday’s trading. While the pre-market action showed some recovery in its share price, trading could be volatile in the near term. 

While the initial reaction from analysts is adverse, logic dictates that a strong and profitable Petrobras is good for the Lula administration. Political involvement in the company doesn’t necessarily mean Petrobras is headed back down the corruption highway. 

Petrobras stock has performed poorly in 2022. It’s down more than 15% year-to-date. That’s not good, given the S&P 500 energy sector is up nearly 53%.

In the nine months ended Sept. 30, Petrobras’ revenue was $94.3 billion, 57.4% higher than a year ago, with a 68.7% increase in operating profits, to $46.0 billion. Business isn’t hurting. 

I like the call because it’s got a delta of 0.52485, which means its share price needs to rise by approximately $2.66 over the next 127 days for the $1.40 ask to double in value. That’s a 29% move in the share price for a 100% gain on the option itself. 

At a $140 premium, the potential upside seems much better than the downside.

The Telephone Is Ringing

The second call on my list is the Ericsson (ERIC) April 21/2023 contract with a $7.00 strike price.

Like the Petrobras call, this particular Ericsson call contract expires in 127 days. However, while the oil company’s $1.40 ask price was 15.6% of the $9 strike, the ERIC call’s $0.45 ask price is just 6.4% of the $7 strike. 

From this perspective, ERIC could be an even better option play. 

Of course, Petrobras has a business that’s booming. Ericsson’s margins have gotten hammered while it battled Apple (AAPL) over patent royalties. At the same time, while 5G is driving revenue growth, it comes with lower margins. 

Fortunately for its shareholders, the company reached an agreement with Apple last week that gives both firms a multi-year licensing deal and puts to bed “all ongoing patent-related legal disputes between the parties.”

As a result, the company expects to reach its 15-18% EBITA margin goal by 2024, substantially higher than 11.2% in Q3 2022. It plans to achieve this goal, in part, by cutting $800 million in costs by the end of 2023.

Ericsson is currently generating positive free cash flow despite less-than-optimal margins. Its price-to-sales ratio of 0.87 is lower than it’s been since 2017. 

I like the $45 bet here. 

Grab This One While You Still Can

The third call on my list is the Grab Holdings (GRAB) Jan. 20/2023 contract with a $4.00 strike price.

Like ERIC, the Asian ride-hailing and food-delivery firm are not having a good year in the markets, down 54% despite gaining back 32% over the past six months. 

On Dec. 15, Reuters reported that the company would freeze hiring for most positions, freeze executive salaries, and cut travel and expense budgets to cope with an ever-changing global economic environment. 

In mid-November, the company reported a smaller-than-expected Q3 2022 loss due to cost cuts implemented earlier in the year. Although it still lost $327 million in the third quarter, it was about a third of its loss in Q3 2021. Further, it doubled revenue in the quarter to $382 million.

Other positives: The company’s delivery business broke even on an adjusted EBITDA basis, three quarters ahead of schedule. In addition, the ride-hailing unit doubled its revenues and adjusted EBITDA during the quarter. 

The company’s goal to reach profitability in 2024 remains on the table. It said in November that it would continue to focus on keeping costs in line while continuing to grow revenue. 

In the meantime, the volume Wednesday on the Jan. 20 $4 call was a whopping 65.33x the open interest. Somebody’s got a good feeling about the next 37 days. 

Its shares have to increase by 30% from where they’re currently trading to break even. A double of the premium ($25) by Jan. 20 is more than doable.   

 

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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.