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Unusual Options Activity: 3 Call Options to Buy After One Hellish Day in the Markets
September 13 will be remembered as a day investors got slaughtered. All the major indexes were down more than 3.5%.
While investors might not be in the mood for discussions about unusual options activity, that’s precisely what I’m going to do. I’ve learned over more than a decade of writing about stocks that tomorrow will always be different.
For today, you’ve got to lick your wounds, move on, and remain focused on executing your long-term investment game plan.
With that in mind, these three call options exhibited unusual options activity, and in my opinion, they make intelligent long-term buys.
It’s Time to Go Global
First up is Liberty Global (LBTYA), a provider of broadband and mobile networks in the United Kingdom, The Netherlands, Belgium, Switzerland, Ireland and Slovakia.
At the end of July, Liberty Global reported Q2 2022 results that included a 1.0% increase in adjusted revenues to $1.75 billion, while adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) decreased 3.6% to $649.8 million.
Regarding customers, it lost 19,900 customers during the quarter, considerably more than the 2,400 in Q2 2021. However, its Virgin Media O2 joint venture with Telefonica (TEF) in the U.K. returned to growth in the quarter, adding 8,000 fixed-line and 13,000 mobile customers.
You might have difficulty understanding its results if you don’t have a Ph.D. in finance.
On June 1, 2021, Liberty contributed its Virgin Media U.K. assets to the VMO2 joint venture (JV) with Telefonica, which contributed their U.K. mobile business. Each company owns 50% of the JV.
So, on page 3 of its Q2 2022 10-Q, you’ll see a 79% decrease in its continuing operations before taxes. If you subtract the $11.14 billion gain in Q2 2021 from its transfer of assets to the VMO2 JV, it did reasonably well in this year’s second quarter.
“[W]e think we’re really well positioned to manage through the current environment. The demand for connectivity, fixed and mobile, has never been stronger, and we don’t see any-
thing impacting that long-term secular trend,” stated CEO Michael Fries in its Q2 2022 conference call.
“In fact, we see more positive catalysts for consumption going forward, whether that’s smart 5G solutions in the B2B space or the continuation of hybrid working, the proliferation of gaming, adoption of streaming services or whatever ultimately flourishes out of the new metaverse.”
As a result, it confirmed its 2022 full-year guidance of $1.7 billion in Distributable Cash Flow. It finished the second quarter with $4 billion in cash on its balance sheet and nearly $6 billion in liquidity. On top of this, it upped its share repurchase program for 2022 by $400 million to $1.7 billion. That’s a reduction of its share count by 14%.
As for the call exhibiting unusual options activity, I’m focused on the Oct. 21 $20 contract, which has a volume today of 18,218, 154.4x the open interest. At just a $60 premium, the $20 call looks very inviting.
Here Come the Animals
The second call option to catch my interest is the Nov. 18 $17 contract for Elanco Animal Health (ELAN). Its volume at the close is 7,215, 46.6x the open interest. With 66 days to expiry, the breakeven is $17.90, 16.5% higher than its current share price.
Down almost 54% over the past year, and given Barchart’s analyst rating suggests it’s only a hold in the eyes of Wall Street; you probably think that I’ve lost my mind. However, I’m a fan of animal-related businesses, and I believe that Elanco’s got some exciting products to drive its shares higher in the future.
On Sep. 8, Elanco announced that Scott Ferguson, the activist investor founder of Sachem Head Capital Management, had stepped down from the company’s board after almost 24 months of working with its management to right its business.
“I believe that the Company has established the right plan to create shareholder value through sustained cost discipline and developing its innovation pipeline. As the Company executes on its plan, I believe the market will come to appreciate the good work that is being done by management and the Board,” the press release stated.
Sachem Head owns 6.0% (28.64 million shares) of Elanco stock. He is stepping down to spend more time on other investments.
That’s excellent news for Elanco shareholders.
Sitting at its lowest point since the March 2020 correction, now looks like the perfect time to bet on Elanco’s innovation pipeline.
Is Elon Ready for Some Good News?
Tesla (TSLA) lost slightly more than 4% in Tuesday’s bloodbath. It is now down 17%, which is not too bad compared to some of the electric vehicle (EV) maker’s competitors.
The April 21/2023, $316.67 call contract is intriguing. Its volume on the day is 37,367, 18.2x the open interest. Its ask price of $45.10 means its share price has to increase 24% over the next 220 days to break even.
Unless we go into recession, which looks less likely by the day, I’d say TSLA stock’s got a fighting chance to get to $362 by Easter.
The bears will argue that Tesla will continue to face increased competition in all the markets where it competes. Barron’s reported on Tuesday that BYD (BYDDY) -- Warren Buffett’s 10th-largest holding -- could be planning EV expansion in the U.S., Tesla’s home market.
While nothing’s set in stone at this point, it’s worth considering if you’re thinking about buying TSLA.
However, on the plus side, Tesla’s deliveries in China took off in August after the company ramped up its product at its Shanghai gigafactory. According to the China Passenger Car Association, Tesla delivered 34,502 vehicles to Chinese customers in August, with more than 42,000 exported outside China.
As more factories open, it’s hard to imagine Tesla won’t continue to garner a significant chunk of EV sales.
With a $4,510 premium, you better be prepared to exercise your call before it expires. That’s not chump change.
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