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Unusual Options Activity: 3 Calls to Buy With Really High Ask Prices

Barchart - Fri Jul 22, 2:33PM CDT
Stocks-Money-Rates - Nasdaq Times Square

Each Friday, I write about unusual options activity in the markets. 

As someone still feeling his way around the options market, I’ve tried to come up with original ideas that readers will find interesting. I’m sure the options junkies out there fly much faster. Still, my experience evaluating companies and writing about them for over a decade enables me to add value to investors interested in betting on these businesses through the use of options. 

This morning, it suddenly dawned that I’ve only talked about call options in these weekly commentaries. It would make sense to look at the put side of the ledger for a change. That will have to wait until next week.

Today, I want to look at call options trading with large ask prices. 

Why large ask prices?

Let’s look at Tesla’s (TSLA) Aug. 5 $765 call option that’s set to expire in 14 days. It has a bid price of $75.60 and an ask price of $77.75. Currently, in the money by 2.1%, the breakeven is $842.75, $16 above its current share price. 

So, in this instance, you’re betting it will not fall over the next two weeks. I’m not sure I’d have the courage to make the $7,775 bet. I guess that’s why I’m writing about this stuff rather than doing it. 

Anyway, here are the three that interest me the most.

Meta Platforms

As I write this, Meta Platforms (META) is down almost 8% on the day and 50% for the year. Things have gotten so bad for Mark Zuckerberg that META/FB is down 2% over the past five years compared to a 60% gain for the S&P 500.

If you’re a Johnny-Come-Lately to META stock, you’re crying in your beer because you know it could worsen before it gets better.  

However, if you’re aggressive, I don’t see how the Dec. 16 $165 call isn’t at least a little compelling. The ask is $26, the bid is $25.75, and it’s slightly in-the-in the money47 days until expiry. 

Talk about a nice early Christmas gift.  

Meta is down because it’s caught in Snap’s (SNAP) dangerous wake. Down almost 40% on poor Q2 2022 results -- it lost $422 million on $1.11 billion in revenue -- $80 billion has been shed in one day by social media companies. 

Meta’s earnings come next week. I suppose there’s an argument that the call will be much cheaper after it reports. Unless, of course, it delivers a surprise.

“While open questions will remain on how idiosyncratic this dynamic is (until Alphabet and Meta report earnings next week), our own industry checks over the past two months were muted but more optimistic than this earnings report,” CNBC reported Goldman Sachs analysts said about Snap’s earnings. 

META still had $8.5 billion in free cash flow (FCF) in Q1 2022, up 9.1% over last year. Its trailing 12-month (TTM) FCF is $39.8 billion, good for an FCF yield of 8.7%. 

When have you been able to buy Zuckerberg’s company for this cheap? Never.

HCA

What a strange time it is in the markets.Hospital operator HCA (HCA) reported Q2 2022 results on Friday before the opening, and they were better than expected. Revenues rose 2.8% to $14.8 billion while earnings fell 17.2% to $1.2 billion, or $3.90 a share. Yet, HCA is up more than 12% on the day because it beat by $100 million on the top line and $0.20 per share on the bottom.

That’s less than a 1% beat on revenue and 5.4% on earnings. Hardly earth-shattering but investors are grasping for straws right now. 

I know I’m supposed to convince you that the Dec. 16 $230 call is the cat’s meow, not arguing why the gains are unwarranted. I’ll get to that. In the meantime, the breakeven on this one is $239.80, which means HCA stock has got to move 17.5% over the next 147 days. 

Were it to do this; the stock would finish 2022 slightly underwater. But I digress. 

The big question mark for the future is what Covid-19 looks like in America. If HCA is inundated with patients, its elective surgery revenue goes out the window, and that’s where the big money is.

Here’s what McKinsey had to say about elective surgery in 2020:

“The financial impact of this reduction in elective procedure volume, which typically drives a disproportionate share of revenue and margin for hospitals, caused an estimated $200 billion in financial losses for hospitals and health systems between March and June 2020, before accounting for relief funds,” Mckinsey’s Healthcare Systems & Services practice wrote in October 2020.

The stock’s been held back because no one knows if elective surgeries will return to pre-pandemic levels soon. Further, many of those postponed may go away and never get done. 

That’s possible, but by almost every financial metric, HCA stock is cheaper than it’s been since 2018.

Alphabet

Earlier in July, Monness, Crespi, Hardt & Co. analyst Brian White cut his target price for Alphabet (GOOGL) from $175 to $145 on concerns about digital ad spending in a recessionary period. Other analysts have done the same. 

Three months ago, 42 analysts rated GOOGL a buy. Today, it’s 38. That said, all that’s changed is two buys lowered their rating. None have a sell on its stock. The average target price is $150.72, well above where it’s currently traded and higher than the Sep. 2023 $127.50 call.

Like Meta, Alphabet generates a boatload of free cash to help insulate it from any digital ad spending slowdown. In the meantime, analysts expect it to earn $5.44 a share in 2022 and $6.41 in 2023. Those estimates are down 40-50 cents from three months ago, but given its share price is off more than 8% over this period and 21% year-to-date, it makes complete sense to lower targets. 

There are bumps ahead. 

Long-term, however, you’ve got the opportunity to buy a stock whose forward price-to-earnings ratio is lower than it’s been since 2014. I find it hard to believe that big advertisers will abandon digital when recessions are the best time to spend on customer engagement.

So, in the case of the GOOGL call, you’ve got a $9.40 ask price at present, which makes the breakeven $136.90, also below the average target price.

If it were me, I’d rather take the $940 risk for a long-term bet on GOOGL than the near-term bet on Tesla. 

But that’s just me. 


 



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