Rising from the Oats: Unraveling the Potential Behind Oatly's (OTLY) Risky Rebound

Is it time to buy some of this year’s worst-performing growth stocks? That’s a question that Barchart content partner The Motley Fool recently posed. And if you happen to be talking about Oatly (OTLY), a Swedish food company specializing in oat-based alternatives to dairy products, then yes, it’s possible that it could be an acquisitive opportunity.

Stop right there. If you don’t know Oatly, the first thing you’ll probably do is to pull up its price chart. And at that point, you’ll realize that we’re talking about a literal penny stock. Granted, it stormed over 42% higher in the trailing five sessions from last Friday but still. Given the terrible losses the speculative enterprise incurred, the robust percentage gains only took OTLY stock to 82 cents.

That’s your warning. Honestly, I don’t want to hear complaints about OTLY stock turning against you if it tumbles from here on out. It’s an extremely risky gamble, having hemorrhaged 59% of equity value since the January opener. If that wasn’t enough of a warning, the Barchart Technical Opinion indictor flashes in a bright red box, “SELL.”

If you have any inkling about putting down money that can hurt you if you lose it, believe me, the universe or [insert favorite deity here] is speaking to you. Loud and clear. Also, my Twi…err…X account does not provide a messaging stream to the heavens above although you are free to sound off should you please.

With those caveats out of the way, Oatly on a fundamental level does seem to provide relevance. According to information cited by Supermarket News, 87% of Generation Z respondents to a 2022 consumer survey reported that they could be convinced to buy plant-based alternatives.

Since that’s the emerging consumer generation, it’s practically the most important market. Even better, the technical argument suggests that OTLY stock isn’t done rising just yet.

OTLY Stock May be All About That Gamma Squeeze

Gamma squeezes are powerful. Similar to a short squeeze, the underlying catalyst centers on panic – the panic that if short traders don’t cover their bearish bets, they’ll incur more damage. For those of you who aren’t familiar with gamma squeezes, I encourage you to read my Barchart article on the topic. However, for a quick breakdown, an illustration is helpful.

Let’s imagine that you contracted to sell a car to a buyer at an agreed-upon price and on a specific delivery date. These transactions happen all the time. However, in perhaps 99% (?) of the time, the seller has physical ownership of the vehicle in question. Let’s say that you left out this important piece of the puzzle.

No matter, you know you’re going to get the car, right? Since wheeling and dealing is your forte, you decide to settle the deal first before bothering to acquire the soon-to-be-sold car first. Well, let’s just say that the car in question is a special edition and for whatever reason, it spiked dramatically in value.

Now, you’ve got a choice to make. Do you bite the bullet before you suffer significant financial damage (because you’re already contracted to sell the car at an agreed-upon price) or do you wait it out? However, if you choose the latter, the clock might run out on you.

That’s basically the situation we have with OTLY stock. As Barchart’s unusual stock options volume indicator shows, OTLY represented one of the most aberrant trades, with total volume jumping to 11,248 contracts, a 456% leap from the trailing one-month average volume. Even more conspicuous, 10,921 contracts stemmed from call option demand.

On the surface, that might seem bullish for OTLY stock and it probably is but in an ironic sense. You see, Fintel’s options flow screener shows that likely institutional investors engaged a huge chunk of that call volume. However, the screener shows that these were sold (written) calls.

In other words, major entities underwrote the risk that OTLY stock will not be above the underlying strike price of 50 cents by the Jan. 19, 2024 expiration date. That’s a risky wager for the shorts.

Risks of Being Too Bullish on a Bearish Bet

As a horror film aficionado, I instinctively know that if I see something impossible – a hockey-mask-wearing villain suffering fatal trauma and yet resuscitates himself – I’m in a devastating paradigm. I should never assume that the villain has expired because you’re never really safe until after the credits roll and after any post-credits scene is broadcasted.

That may be what’s happening with OTLY stock. In October, bearish institutional traders also sold 50-cent calls, this time with a Dec. 15, 2023 expiration date. Obviously, this trade is working against them as shares trade hands for 82 cents, as stated earlier.

So long as the bears panic and continue to cover their position by buying up OTLY in the open market, it will likely rise higher and higher. Yes, it may be inexplicable given the bottom-line losses that Oatly incurred in the past. But so long as contrarian bullish speculators apply the pressure, the bears should be mindful of the risks with OTLY stock.

More Food & Beverage News from Barchart

• Soymeal Futures Fall Before Weekend
• Friday Wheat Faced More Sell Pressure
• Friday Loss Limits Corn’s Weekly Gain
• Coffee Posts Moderate Losses on Forecasted Rain for Brazil

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.