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3 Call Options to Buy With Far Out DTE’s

Barchart - Fri May 20, 11:02AM CDT
Stocks-Money-Rates - Buy Or Sell Signal Cards

In my latest commentary about attractive call options, I thought I’d change it up by looking at call contracts with expiry dates of six months or longer. 

Why look at stocks with such far-out call options? 

Because they give your trade more time to pay off by trading in the money, the downside is that the call options will cost you more. It’s not a free ride. 

Each of the call options I’ve selected for entirely different reasons. Ultimately, however, if you’re buying call options, I do believe that the underlying fundamentals of the company’s financials and business strategy are sufficient for you to bet your hard-earned money on a future payoff. 

Here are my three call options to buy that have the potential to pay off for you. 

Coty (COTY)

There is no question that Coty (COTY) hasn’t done much to deserve investor attention in recent years. The beauty products company’s stock’s been a full-on disaster. Down 40.9% year-to-date through May 20 and 70.5% over the past five years, it’s hardly Berkshire Hathaway (BRK.B). 

I’ve always thought that the patient money of JAB Holdings, the investment arm of Germany’s Reimann family, would figure out what to do with the struggling business. In October 2016, Coty acquired Procter & Gamble’s (PG) mass-market consumer brands such as CoverGirl, for $12.5 billion.

However, Coty’s share price has lost 72% of its value since the acquisition. In September 2020, JAB brought in former L’oreal (LRLCY) executive Sue Nabi to turn things around. 

While the share price continues to flounder, the business turns a corner. Coty’s revenues jumped 22% over last year in the first quarter. It’s delivered two consecutive quarters with revenues that didn’t miss the mark. 

Gone is the M&A focus. Coty’s now building its existing brands to take market share. The results since Nabi took over suggest it's a company on the cusp of true success. 

So, this optimism has me looking at the $7 JAN 20 2023 call. It’s currently 9.2% out-of-the-money (OTM) with 245 days until expiry. The current bid is $0.98, so COTY has to get to $8 to break even on the trade. The call’s open interest is 22,608 with an implied volatility of 60.64%, slightly higher than its historical volatility of 52.65%. 

Pure Storage (PSTG)

BofA Securities downgraded Pure Storage (PSTG) to Neutral on May 20 while lowering its 12-month price target to $27 from $34. It currently trades a little over $23, down 8% on the day. 

“We are cautious on demand trajectory over the next several quarters, where our checks (see our VAR surveys: Dell, NTAP) indicate that confidence in storage spending is turning lower. Storage has also been relatively immune to supply chain issues and pent-up demand is a lower tailwind,” stated BofA analyst Wamsi Mohan.         

The data storage hardware and software maker has been on a crazy ride in 2022. Down 35% YTD, it gained 36% in March on excellent Q4 2021 earnings. In April and May, it’s given it all back. The analyst’s downgrade won’t help.

Despite the downgrade, the 20 analysts covering PSTG give it an overall Buy rating with an average $38.44 target price. Seventeen of the 20 are either have it as a Buy or Overweight. 

In 2021, Pure Storage grew revenues by 29% to $2.18 billion, annual recurring revenue by 31% to $848.8 million, and its remaining performance obligations (RPOs) by 29% to $1.4 billion. Its non-GAAP operating income was $235.0 million. 

In 2023, it expects revenue of $2.6 billion (19% growth) and $300 million non-GAAP operating income (28% growth). With free cash flow growing from $7.7 million in 2018 to $307.8 million in 2022, it’s becoming financially stronger by the day. 

Of all the DEC 16 2022 call options available, the $30 strike price has the highest open interest at 1,256 contracts. The next highest is $40 at 526. 

The $30 call has 210 days to expiry and sits at 26% OTM with a $1.85 bid price and implied volatility of 56.79%, around the average for the DEC 16 2022 calls.      

Nvidia (NVDA)

If I could only own one tech stock, Nvidia (NVDA) would be at the top of my list. Heading into the second half of 2022, NVDA stock lost more than 51% in the first half of the year. It’s trading within 10% of its 52-week low. 

In my experience, whenever Nvidia stock looks vulnerable, the company turns on the gas. I expect its share price to return to $300 in good time. It all depends on what the overall markets do. Right now, except for energy, most investors' holdings are taking a beating. Patience is a virtue right now. 

As for the company, it’s got pristine income, balance sheet, and cash flow statements. Over the past five years, it’s grown free cash flow from $2.9 billion in 2018 to $9.1 billion in 2022. As a result, its cash and marketable securities on the balance sheet have ballooned. 

The company’s products are influencing so many industries, trends, and technologies at the moment that it must be hard for CEO Jensen Huang to keep it all straight. That’s a good problem to have.  

When the market’s bloodletting stops, Nvidia’s stock will be at the front of the pack, leading the charge higher. I believe it will happen before September 2023.

That’s why I’ve focused on the $345 SEP 15 2023 call. It’s got 483 days until expiring. So there’s plenty of time to gain some momentum. The bid is currently $5.20, which means to make any money on this call, it’s got to get to $351 or higher before September 2023. OTM by more than 108%, the option price might seem expensive, but you’ve got to pay for greatness.

An alternative could be the $375 call. It’s got a bid price of $3.70, but I don’t believe the $1,50 saved for a strike price $30 higher is worth it. 

Nvidia could get to $345 within 16 months. Reaching for $375 might be pushing it.