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2 Unusually Active Long-Duration Call Options I Really Like

Barchart - Thu Oct 5, 2023

The jobless claims data released on Thursday showed that 207,000 people had applied for unemployment insurance in the past week, 5,500 lower than the FactSet estimate. In addition, continuing claims fell by 1,000, to 1.66 million, 20,000 less than economists expected. 

All three major U.S. indexes fell in early trading on the news. The job market remains stubbornly buoyant, resulting in higher Treasury yields. 

Several companies reported earnings yesterday after the close and this morning before the markets opened. Investors did not like what they heard from Rivian Automotive (RIVN) and Clorox (CLX). They fell by 17% and 8% in early trading. 

Regardless of the near-term noise, opportunities remain to buy stocks in good companies using unusually active options data as your guide. 

I am looking at Wednesday’s trading. I see two long-duration call options that I like. 

Berkshire Hathaway

When I think of stocks and options trading, Berkshire Hathaway (BRK.B) rarely comes to mind. And that’s too bad because it is an outstanding stock to own. 

I'll grant you Berkshire has minimal options volume. The 30-day average for BRK.B is 14,311. Multiply that by 100, and we’re talking about 143,110 shares or about 4% of the 30-day average of 3.47 million. 

So, Berkshire would never be confused with Tesla (TSLA) regarding options. It trades more options per minute than Warren Buffett’s company stock daily.

Anyway, the Jan. 16/2026 $400 call had a volume on Wednesday of 671, 1.66x the open interest. Anything over 1.25x is considered unusually active. 

The ask price of $31.50 was 9.2% of the $343.69 closing price. That’s a reasonable down payment for a bet of more than two years. Given a delta of 0.49996, the share price has to rise by $63.01 for you to double your money on the call. 

I don’t know about you, but I’d be willing to take half that amount. So, if Berkshire’s share price increases by $31.50 (9.2%) over the next 835 days, and you choose to sell the option rather than exercise your right to buy 100 shares at $400, you’ve still done alright. 

The bigger question is whether BRK.B stock can appreciate by 26% over the next two years. It’s gained 58% over the past five years, about 11 percentage points higher than the S&P 500. 

I don’t think there’s any question it can do so. However, and more importantly, should it fall back to $300, you’d only be out $3,150 rather than $4,369 if you bought the shares at yesterday’s closing price. 

It’s a good offensive/defensive kind of play. 

Carnival

I have mixed emotions about cruise stocks. Always have. My wife and I got married on a cruise ship. We’ve never taken another cruise since. However, we did enjoy Royal Caribbean’s (RCL) exemplary service. 

I also find cruise ships to be engineering marvels. It’s incredible how much they can stick on your modern ship. They really are floating hotels. That said, they are environmental nightmares. Further, they pay little in taxes to U.S. government agencies, federal or state. 

But I digress. 

Carnival’s (CCL) stock in 2023 is up 66%. Kudos to anyone who bought it earlier in the year. That’s the good news. The bad news is that its shares have lost 78% of their value over the past five years. They are far from CCL’s all-time high of $72.70 in January 2018.

We all know what has happened to cruise stocks since then—no point rehashing the pandemic. 

Cruise stocks have lost some of their momentum recently. It didn’t help that Morgan Stanley analysts cut their price targets for Carnival, Royal Caribbean, and Norwegian (NCLH) on concerns higher fuel prices will hurt travel demand. 

Investment pundits question the staying power of cruise lines to continue growing revenues in the face of higher interest rates, a possible recession in 2024, and the aforementioned higher fuel prices. 

But consider this. 

The highest price for a barrel of West Texas Intermediate (WTI) in 2023 is $93.84. The last time it was this high, excluding 2022, was 2014. In fact, in each of the four years between 2011 and 2014, the yearly high was over $105. 

Between 2011 and 2014, CCL’s annual revenue was in a tight range between $15.4 billion and $15.9 billion. In the same period, its operating profit varied between $1.55 billion in 2013 and 2014 and $2.28 billion in 2011. 

How does that compare with today’s business?

In the trailing 12 months ended Aug. 31, its revenue was $20.04 billion, with an operating income of $861.0 million, a significantly lower margin (4.3%) on much higher revenue. In 2019, by comparison, its operating margin was 15.8% on revenue of about $800 million higher. 

Its operating margin between 2011-2014 was highest in 2011, at 14.5%, when oil prices were even higher than they are today.

Look more closely at the latest financial statements, and you’ll see a big difference in the line item “Other Operating Expenses.” In 2022, it was nearly $3 billion. In 2011, it was -$1.0 million.

Why the discrepancy? That line item contains several expenses, but the most important as it relates to the difference between the two years are the losses on the sale of ships. 

You're immediately devaluing your older ships when modernizing your fleet, as all three big players have. When they are sold, it is at a significant loss. 

If you use EBITDA instead of operating income, 2011’s profit was $3.81 billion, just $600 million higher than the trailing 12 months ended Aug. 31. 

I see an opportunity to buy before Carnival’s EBITDA gets back to between $5-$6 billion, where it was in the three years leading up to Covid. 

The Dec. 19/2025 $35 call looks very enticing. With 807 days to expiry, the $0.85 ask is just 2.4% of the strike. Granted, to exercise your right to buy CCL shares, it’s got to appreciate by 174% based on its Wednesday closing price of $13.09. 

So, there’s no denying that’s a big ask from CCL’s share price. However, with a delta of 0.16187, it only has to appreciate by $5.25 (40%) for you to double your money on the call.

To me, the risk/reward is obscenely in your favor.   


 

  


 



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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.

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