Option Market Inefficiency Presents a Bargain Opportunity in Imax (IMAX)

There’s no such thing as a free lunch, especially on Wall Street. However, the options market might present windows of opportunity for astute investors on the prowl. One idea to put on your radar is camera and projection system specialist Imax (IMAX). Known for its impressive, immersive experiences, IMAX stock has been a surprise hit this year.

Since the beginning of January, the equity gained over 41%. After getting off to an inauspicious start in 2024, the bulls have steadily carried IMAX stock higher. Even better, it’s not just a matter of technical dynamics. In the second quarter, management disclosed adjusted earnings per share of 18 cents, beating the consensus view of 6 cents.

Now, eyes are shifting to the company’s Q3 report, which is scheduled to be released on Oct. 30. So far, analysts like what they’re seeing, rating IMAX stock a Strong Buy. Further, the mean price target calls for $24.68 per share, with a high-side view of $30.

Still, not everyone shares the same optimistic perspective. Notably, the downside target sits at $14.50. Moreover, one analyst has gone so far as to peg IMAX stock as a Strong Sell. While that seems harsh, implied volatility (IV) clocks in at 46.65%, above the average historical volatility (HV) of 37.16%.

Using stochastics analysis, we can surmise that for the next available options chain (expiring Nov. 15), the projected price movement for IMAX stock is around $2.68, either to the upside or down. This figure stems from the share price multiplied by IV multiplied by the square root of the quotient of the time to expiration over 365 calendar days.

That leaves a lot of variability — and a potential opportunity.

Go With the IMAX Stock Options Flow?

Even with IMAX stock enjoying a strong performance, the Street apparently believes that lightning will strike twice. First, on Friday, the company represented one of the top highlights in Barchart’s screener for unusual stock options volume. This screener highlights pronounced activity, which could shed some light on trades that the smart money is interested in.

Specifically, total volume hit 5,307 contracts versus an open interest reading of 35,293 contracts. Friday’s volume stood at 932.49% above the trailing one-month average metric. Further, the breakdown appeared overwhelmingly bullish, with calls accounting for the vast majority of the day’s volume (5,273 contracts).

Of course, it’s important to note that options are two-sided affairs: if someone buys a call, another party is selling it. That’s why options flow — which filters exclusively for big block transactions likely placed by institutional traders — is a valuable resource. At the end of last week, net trade sentiment stood at $613,500.

What’s more, 100% of that figure was for trades with bullish sentiment. Apparently, very few of the alpha dogs are pessimistic about IMAX stock. It’s not always the best idea to jump in on the same boat as everyone else. However, if the heavyweights see an upside opportunity in Imax, it’s difficult to go contrarian without justification.

Considering that the latest jobs report came in stronger than expected, it wouldn’t be out of the question for Imax to beat Q3 earnings estimates. If that happens, shares could easily fly higher.

Taking Advantage of an Inefficiency

With the focus now firmly on the optimistic side of the aisle, adventurous investors may want to consider a bull call spread for the options chain expiring Nov. 15. Specifically, the 21 / 22 call spread — with a projected return of 81.82% — seems awfully enticing.

Yes, there are certainly more conservative call spreads to consider. For example, the 18 / 22 spread features a gap to breakeven of 1.73% in the good; that is, IMAX stock closed on Friday at $21.16. The breakeven for this trade sits at $20.80. Shares just need to hold steady for the spread to be profitable.

Still, the projected return for the 18 / 22 spread is only 42.86%. Sure, the 21 / 22 spread features a breakeven price of $21.55. IMAX stock must gain 1.81% from Friday’s close just to hit the zero line. However, IV suggests there’s more than enough potential gas in the tank.

Further, I characterize the 21 / 22 spread as a mini-arbitrage opportunity because the projected payout for the higher strike spreads is either identical or similar, yet the risk (relative to the gap to breakeven) expands unfavorably. As well, the net debit paid of 55 cents is relatively cheap — some might say a bargain.

In other words, you’re getting the same amount of projected return for less risk. If that’s not mini-arbitrage, I don’t know what is.

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On the date of publication, Josh Enomoto 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.