Are These 2 Unusually Active Call Options Under $1 Worth Buying?

Will Ashworth - Barchart - Thu Jul 20, 2023

A quick look at the options market in late Thursday morning trading tells me I’ve got my work cut out when finding a subject worth discussing today.

As of 11:00 a.m. EST, the total option volume is 15.3 million, about 39% of the average daily volume. As for unusual options activity, the top Vol/OI ratio is 29.08x, a telltale sign that investors have already left for the weekend.

While discouraged, I’ve found two tech stocks with unusually active call options with ask prices trading under $1. Are either of the calls worth buying?

Let’s have a look.

Pagaya Technologies

I've excluded all call options expiring in less than two weeks to give myself a fighting chance. So, that’s 15 days to expiration and beyond. That leaves me with 31 possibilities. Of course, they’ve got to be tech stocks.

Pagaya Technologies (PGY) happens to qualify. The company builds artificial intelligence infrastructure for financial lenders to do real-time AI-driven credit analysis, accelerating the lending approval process.

It sounds a little like Upstart Holdings (UPST), but that’s only with a cursory inspection of Pagaya’s investor relations page. Unfamiliar with PGY’s trading history, I am shocked that it’s up nearly 94% year-to-date. That can happen when your shares traded below $1 as recently as May.

Pagaya went public in June 2022 when it merged with EJF Acquisition Corp., a special purpose acquisition company (SPAC) sponsored by EJF Capital LLC, a DC-based alternative asset manager co-founded by Manny Friedman and Neal Wilson in 2005.

EJF Acquisition raised $250 million through its February 2021 initial public offering. Its qualifying transaction with Pagaya was announced in September 2021. Pagaya did a $350 million PIPE (private investment in public equity) in January 2022. The combination closed six months later.

Investors in the PIPE included GIC, Singapore’s Sovereign Wealth Fund, and several other large institutional investors. The PIPE valued the company at an enterprise value of $8.5 billion, nearly 6x its current value.

In April, GIC extended its strategic partnership with Pagaya for three years beyond the original five-year term. It owns 9% of Pagaya.

If you’re an aggressive investor, that’s a good sign.

Pagaya has four options with ask prices under $1. The highest Vol/OI is the Feb. 16/2024 $5 strike with a $0.50 ask. That’s a 10% down payment with 211 days to expiration.

Even better, the delta is 0.45967, which means the share price only has to rise by $1.09 for you to double your money on the call. You don’t have to wait to see if the share price gets to $5.50 to consider whether you’ll exercise your option on the call.

The risk/reward for aggressive investors seems like a slam dunk.

Twilio

I’ve always liked Twilio’s (TWLO) business. However, its stock’s been a big disappointment. Twilio went public in June 2016. If you’re still holding, you’re sitting on a 329% return over seven years, a compound annual growth rate of 23.1%.

While that’s an excellent return, it traded for $435 in February 2021. That’s a big comedown.

In 2023, TWLO is up 28% YTD, which is respectable relative to the S&P 500. However, it just got downgraded to Neutral from Overweight by Piper Sandler. It also got a $15 cut in its target price to $71, 10% higher than its current share price of $64.49.

Overall, analysts generally like the Communications Platform-as-a-Service business. The 28 that cover it have a Moderate Buy (3.71 out of 5) rating with a mean target price of $73.96.

If you’re not opposed to non-GAAP financials, Twilio’s business looks relatively healthy. In the first quarter, revenues increased by 15% to $1.01 billion with a non-GAAP profit of $103.8 million, considerably higher than the $5.0 million profit in Q1 2022. Over the last year, Twilio added more than 32,000 active customers, a 10%+ increase.

Yet, its price-to-sales ratio is 3.15x, far lower than its five-year average of 15.85x. Like Pagaya, Twilio is not for the faint of heart. GAAP losses of more than $264 million are hard to sweep under the carpet.

Nonetheless, the Jan. 19/2024 $145 strike is appealing. The ask price of $0.52 is a 0.04% down payment on its triple-digit share price. You’ve got 183 days to see if something will happen to move its share price into triple digits.

If buying its stock is your only aim, TWLO has to climb by $80 or 124%. That’s a lot to ask of it. However, even with a delta of just 0.05036, its share price only has to increase by slightly more than $10 for you to double your money on the ask.

You can’t buy all that many lottery tickets for $52 these days—something to consider.

The Bottom Line

Of the two stocks, Twilio is the one I’d be more inclined to buy for the long haul.

However, despite knowing little about Pagaya, the company's business strategy has intrigued me. Who knows if AI will be the killer tech to drive its growth in the future? We’re still very early in the game.

From an aggressive investor's perspective, both seem like good risk/reward propositions for less than a $100 outlay. I spend more than $100 a month at Starbucks.

Good luck.

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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. For more information please view the Barchart Disclosure Policy here.