An institutional investor decided today to make a large long-term bet on the long-term prospects of Antero Resources (AR), a natural gas exploration and production company. They did this by buying at-the-money (ATM) call options with almost a two-year expiration period.

Barchart's Unusual Stock Options Activity Report on Feb. 22 showed that the investor bought 529 call options at the $25.00 strike price for expiration on Jan. 17, 2025. That is 695 days from now, or 1.9 years from now (almost 23 months). This is also known as a LEAPs option (long-term equity anticipation security).

The price paid for the long-dated ATM call option in AR stock was $7.80 per contract. That is a little over 31% higher than the present stock price of $24.96 per share (actually 31.25%) and 31.2% over the strike price. In other words, the stock has to rise over 31% over the next 23 months for this call option to end up in-the-money.

The investor in this call option has paid $7.80 per contract, or $412,602 in total (i.e., $7.80 x 529 x 100). That allows them to control the equivalent of 52,900 shares in AR stock. 

Leverage Effect

I showed in a previous article on unusual call options activity in Fluor Corp (FLR) investors in long-dated calls gain significant advantages. One of these is that this provides them with significant leverage. For example, to buy 52,900 shares outright would have cost $1.32 million. So, in effect, they have a 3.2x leverage effect with the purchase of calls (i.e., $1.32 million/$0.4126 million).

Moreover, the call options investor knows full well that they may not have to wait 2 years to make a significant profit. For example, AR stock is down 12% YTD, and off 42% in the last six months from $43.00 per share.

So, assuming AR stock rises back up to $43.00, or up 68% from today's price, it's likely that the AT Jan. 17, 2025 call option will trade for slightly more than $18.00 per call (i.e, $43-$25.00). That is due to the extrinsic value that will be left in the call option premium. That could rise the premium price to $20 or so, which represents a return of 156% on the original $7.80 purchase.

Moreover, this long-term call investor could possibly reduce the cost of the long-dated call option by selling near-term out-of-the-money (OTM) put options. For example, the investor could sell $20.00 strike price puts that expire on April 21, 59 days from now, for 47 cents per put contract. This strike price is 20% below today's price, and that is not very likely to be exercised. In other words, if this trade can be repeated every 2 months for the next 23 months, i.e., 12 times, the investor could theoretically collect $5.64 per put contract. 

The issue is whether the investor is willing to do this. They would have to short 529 puts every 2 months. At 47 cents per contract, that would bring in $24,863 every 2 months. If this could be done 12 times over the next 2 years (assuming the investor continues to hold the call options) it will result in almost $300K in income ($298.356K). That covers 72% of the original $412.6K cost of the call options.

But, as I have shown above, the investor might not have to wait that long, assuming AR stock recovers to its former levels.

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