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Unusual Options Activity: 3 Financial Stocks Whose Call Options Look Interesting

Barchart - Fri Oct 7, 2022
Options - shutterstock_1418448926

It’s been an interesting week for the S&P 500. The index gained 5.65% in the first two days, giving a good portion of it back on the final two days of the week. 

Financial stocks are one of the themes for unusual options activity that jumps out at me as I write this at the Friday close. There seemed to be several different news stories that appeared in recent days to spark investor interest. 

Here are three call options and their underlying stocks that caught my interest on the first Friday in October. 

Credit Suisse

Credit Suisse (CS) said on Friday that it would buy back $3 billion of its debt to persuade investors not to jump ship because of its financial troubles. 

While not much has gone right for the Swiss investment firm in 2022 -- its stock is down nearly 50% year-to-date -- the news pushed its share price higher Friday by almost 13% on a day the markets lost badly. Over the past five days, CS stock is now up nearly 24%.

The company’s restructuring plan is expected soon. It will be painful with thousands of jobs lost, significant changes to its investment banking business, and asset sales to stem the tide of negative news. 

The cuts will depend on the amount it expects to lose in 2022. In the first half of the year, it lost $1.92 billion. Full-year losses could top $3 billion, Moody’s Investors Service stated on Oct. 6. As a result, its CET1 (common equity tier 1) could fall below 13% 

The company’s new CEO was brought in to restructure the company. He’s expected to cut more than $1 billion in expenses, possibly turn its investment banking arm into an asset-light business model, and look at selling Credit Suisse’s securitized products business.  

It isn’t going to be easy to fix this mess, especially if the world goes into a global recession. Selling assets for reasonable prices will be next to impossible. 

However, the Nov. 18/2022 $4 call looks attractive with a $1.25 ask price, a Delta of 0.7639, and 42 days to expiration. Given the $5.25 breakeven, it only needs to gain 8.7% to start making money on the calls. 

The risk/reward seems good.

Progressive Corp.

I’m a fan of the Cleveland-based property and casualty business for two reasons other than its solid financials. 

First, Progressive Corp. (PGR) has excellent ads that don’t take their business too seriously. Secondly, CEO Tricia Griffith is one of only 32 women running S&P 500 companies. Data shows that women CEOs outperform their male counterparts. 

Over the past five years, PGR stock has outperformed the index by nearly 108 percentage points, much of the gains thanks to Griffith’s strong leadership. 

As for Progressive’s stock in 2022, it's up 18.5% year-to-date. So far this year, 91 of the 503 S&P 500 stocks are in positive territory. Of those, PGR is the 37th best-performing stock.

Analysts are lukewarm at best about Progressive stock. According to Barchart data, the 15 analysts that cover its stock give it an average rating of Hold with a mean target of $119.50. That’s below where it’s currently trading.

However, as I said earlier, Griffith has done an exceptional job running Progressive’s business. I’m okay with analysts giving it the snub. Its business model is so strong it won’t matter what Wall Street thinks. 

Highlights from the second quarter include an 8% increase in net premiums written, a 12% increase in Commercial Lines policies, and a 5% increase in special lines. Overall, it had 26.51 million policies at the end of June, 129,800 higher than a year earlier.

It’s a tough market right now, but if anyone can handle it, Progressive can.

The call option I’m interested in is the Nov. 18/2022 $115 contract. It’s got 42 days to expiration, a $10.40 ask, and a 0.71586 Delta. Its breakeven is just 2.8% higher than where it’s currently trading.

I like its chances.

HSBC Holdings

HSBC Holdings (HSBC) dropped a bomb on investors this week when it admitted that it was exploring selling its Canadian business, a transaction that would reap close to $10 billion were it to officially put HSBC Bank Canada.

In its latest fiscal year, the Canadian business generated $768 million in pre-tax income for the parent. While that only contributed about 4% of HSBC’s pre-tax profit, it was higher than the bank’s U.S., China, and India operations.

The bank is leaving no stone unturned to fend off calls by its largest shareholder -- Ping An Insurance Group (PNGAY) -- to spin off its Asian business. It believes such a move would add $35 billion to its market cap.     

The HSBC Dec. 16/2022 $26 call has the longest duration, with 70 days to expiry. The $1.78 ask price means its share price has to rise 6.2% to break even. If it officially announces it’s putting HSBC Bank Canada up for sale in the next month or two, buyers of this call should make money. 

But that’s a big if.




 



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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.