Luminar Technologies (LAZR) ramped up for next month as seen in Barchart's Unusual Stock Options Report. The software and sensor technology it produces for electric vehicles is set to ramp up. As a result, the call options for some investors in LAZR stock are attractive.

The company is likely to release its Q3 results on Nov. 2 after the market closes. Analysts now predict revenue of $9.12 million, which is actually slightly lower than the $9.93 million it generated last quarter. Moreover, the company is forecast to produce negative earnings per share (EPS) of 20 cents per share.

But this may already be baked into the stock price. So far in the past 3 months, the stock is down from a peak of $11.06 per share on Aug. 15 to just $8.03 as of mid-day Nov. 2. 

Analysts and investors are hoping to hear that the company will ramp up production of its Luminar units and huge new orders from EV companies starting in Q4 or even early in 2023.

Unusual Options Activity

So why did some investors buy a huge amount of calls for expiration on Dec. 16 at the $12.50 strike price? That assumes the stock will skyrocket by over 57% in just 44 days. This can be seen in the Barchart Unusual Stock Options Activity Report below:

This shows that 5,005 call contracts were bought at the $12.50 strike price for expiration on Dec. 16. But look more carefully. They paid just 13 cents for 5,005 contracts at the midpoint. That means they paid $65,065 to buy these calls. If LAZR stock skyrockets in 44 days, they will have to have to hope that it will rise to $12.63 per share at least to just break even. 

That implies a rise of 57% from today's price. And for all practical purposes, they will likely hope it will rise to $13.00, in order to make a profit, or 62% in less than 2 months.

What is going on here?

I highly suspect that the initiating action was from a covered call investor. They initiated this call option activity by offering to sell 5,000 calls at the $12.50 strike at just 13 cents per contract. That means they immediately received a payment of $65k from either a market maker or another investor who was willing to take the buy side of this transaction.

This probably makes sense to the initiating covered call investor since they may be sitting on 500,000 shares that have fallen from $11.06 in the last 3 months. Perhaps they got sucked into this stock at the peak and paid close to $11.00 per share. That means their investment was $5.5 million in LAZR stock

By selling these covered calls at $12.50 they get the best of both worlds: They get immediate income now and if LAZR stock rises to the $12.50 strike price they get to sell their shares at a profit. But now they collect $65K on their $5.5 million investment, a return of 1.18%. If they can keep doing this each month, their annualized yield will be 14%.

Covered Call Strategy Makes Sense on LAZR Stock

Moreover, let's say the stock only rises to $11.00 by Dec. 16. During those 44 days the call option prices will rise and that is likely why the call option buyers took on the initiating sell action. But the covered call investor still benefits despite holding a temporary loss during that period. Their underlying 500,000 shares will appreciate in value and the covered call investor might be able to make back some of their losses.

And of course, it is also possible the selling investor in these calls may have recently bought 500,000 shares or they bought 50,000 calls at a lower strike price or for less money. 

The bottom line here is, unless the Q3 earnings show that the company expects to dramatically increase production, these calls could end up losing value by Dec. 16. That benefits the covered call investor.

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