In what I’m hoping to become a Friday staple in 2023, today’s article regarding unusual options activity will take a look back at some of the week’s most interesting, not to mention high-volume options trades. 

Leading the way is a cloud stock that’s gotten hammered in 2022 but is getting very close to generating consistent quarterly GAAP profits. In addition, I highlight two real estate-related stocks that rising interest rates have hurt. Lastly, I’ve focused on an integrated oil and gas play that still has the potential to move higher in 2023 despite its gains in the past year. 

The weekend draws nears. Enjoy! 

Datadog shares had a nice move early in the week

Datadog (DDOG) is my choice for the unusual options activity on Monday. 

The company, known for its monitoring and security platform for cloud applications, saw its stock start the week strong, opening trading on Dec. 13 up more than 8%. It then proceeded to lose most of those gains as the week progressed. 

Why were there lots of buyers on Monday? November’s Consumer Price Index report suggested that inflation is easing, which should have a knock-on effect regarding future interest rate hikes. 

Tech stocks that lose money need these items to cool in 2023 for their shares to move again. In Datadog’s case, its stock is down 53% year-to-date.  

The reality is that Datadog is actually performing well. 

Through the first nine months of 2022, its revenues grew by 72% to $1.2 billion, while its operating loss fell by 13% to $24.1 million. On a non-GAAP basis, it had a $243.2 million operating profit, up substantially from a year earlier. 

Datadog is on the precipice of GAAP profitability. 

My option pick for Monday: The June 16/2023 $110 call. It had a volume of 12,736, 37.35x the open interest, with a $5.00 premium. With 185 days to expiration, it has to appreciate by 49% to break even. 

While that’s a tough row to hoe, especially if we move into a recession, the risk appears moderate. 

A leading single-family residential rental stock looked to break out Tuesday

I wrote about Tricon Residential (TCN) in mid-November. I suggested that the Toronto-based owner and property manager of more than 35,000 U.S. single-family home rental properties had a long runway for growth. 

Nothing about the company has changed my opinion for the worse despite the stock losing 13% of its value in the month since the article was written. Down nearly 46% YTD and pennies away from a 52-week low, I don’t think there’s any question that its real estate play will bear fruit in the years to come. 

But for now, it’s got to stay the course and hope that the economic conditions don’t get too treacherous in 2023. In the end, people do have to have a roof over their heads. I’m cautiously optimistic. 

Tricon is sitting on nearly $3 billion to use to buy more properties. Should the economy worsen, it will have plenty of cash to deploy to take advantage of desperate sellers. 

Tricon’s daily volume averaged 1.6 million shares between Tuesday and Thursday this week, more than double its 30-day average volume, with Tuesday’s action the busiest. 

The option that stood out for me on Tuesday was Tricon’s June 16/2023 $7.50 call contract. Volume was 4,525, 23.09x the open interest. The ask price of $1.20 is a hefty 16% of its strike price. 

Normally, I won’t consider anything over 10%, but given there are 184 days to expiration and a 0.64122 delta, the risk-to-reward proposition is tilted in the call option buyer’s favor.  

Can oil stay hot for another 2 years?

I’m asking this question because Wednesday’s unusual options activity had me focused on Royal Dutch Shell (SHEL) and its Jan. 17/2025 $65 call contract. More than two years out (765 days to expiration), buyers are betting that oil and gas prices will remain elevated.

SHEL stock is up nearly 26% YTD and more than 44% over the past two years. However, compared to Exxon Mobil (XOM) -- it’s up more than 70% YTD and 137% over the past 24 months -- Royal Dutch Shell’s shareholders are getting fleeced. 

Analysts are lukewarm about its stock. Of the 9 covering SHEL, six rate it a Strong Buy with a Moderate Buy rating overall and a mean target price of $70.28, 28% higher than where it’s currently trading.

At the end of November, Shell announced that it would acquire Denmark-based Nature Energy Biogas A/S for $2.0 billion. Nature Energy produces renewable natural gas (RNG) from agricultural, industrial, and household wastes. It is the largest producer of RNG in Europe. 

The acquisition accelerates Shell’s transition to net-zero emissions. 

“Acquiring Nature Energy will add a European production platform and growth pipeline to Shell’s existing RNG projects in the United States,” said Huibert Vigeveno, Shell’s Downstream Director. “We will use this acquisition to build an integrated RNG value chain at global scale, at a time when energy transition policies and customer preferences are signaling strong growth in demand in the years ahead.”

Nature Energy has 14 operating plants producing 3,000 barrels of oil equivalent per day, with another 30 in the development stage. These new plants will enable Shell to continue to grow its RNG production for years to come.  

With a $7 ask, shares need to rise by 32% over the next two years. It’s already been done over the past two years, so it’s more than possible.   

Another real estate value play

For my Thursday and final pick of the week, I’m going with Rocket Companies (RKT) and the March 17/2023 $10 call contract. 

Analysts don’t like the mortgage lender’s stock. Of the 13 covering RKT, only one has a Moderate or Strong Buy. Out of a possible 5 rating, Rocket Companies’ gets a 2.85 score, down from 3.00 a month ago.  

The company’s share price is down more than 47% YTD. When most of your revenue is generated from mortgage origination, it’s easy to understand why. Until mortgage demand picks up, Rocket is going to continue to struggle. 

Through the first nine months of 2022, its revenues were $5.36 billion, 48% lower than a year earlier. On the bottom line, its adjusted EBITDA was $263 million, 95% lower than in 2021. 

That’s the danger of investing in cyclical companies. They’re great investments until the floor drops out as interest rates rise. As a result, it continues to diversify its revenue streams to reduce the overall impact on its business in the years ahead. 

One of those revenue streams is Rocket Money, which helps people keep on top of their paid subscriptions. Businesses that help people save money tend to do very well, and Rocket Money is no exception. Its paying premium members nearly doubled in the third quarter. In the first nine months of 2o22, the segment generated $85 million in revenue.

While it’s a work in progress, the foundation Rocket is laying will pay dividends down the road. 

In the meantime, with a premium of just $34 per contract, the risk is next to nothing for aggressive investors.     

 

More Options News from Barchart

• Here’s Why Investors May Want to Take the Contrarian Angle for Vista Outdoor (VSTO)
• Verizon Communications Put Options Premiums Are Attracting Short Income Players
• The Time to Strike Is Now on These 3 Unusually Active Options
• Bearish Bets Against Floor & Décor (FND) Bodes Poorly for the Housing Market

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.