Returning to the Scene of the Crime: Revisiting 3 Unusually Active Put Options From June

Will Ashworth - Barchart - Thu Jan 4, 12:00PM CST

Four days into the new year, I wanted to revisit some recommendations to buy or sell unusually active put and call options in 2023.

Any investor worth their salt revisits past trades to see where they went right or wrong and the lessons to be learned from their past bets. In today’s commentary, I thought I would revisit three unusually active put options from last June that I thought would make above-average income plays.

Here’s what I’ve learned.

Put Option # 1 - AMC Entertainment

All three of my selections from June 16, 2023, were in Barchart.com’s top 100 unusually active options for the day. To qualify for consideration, the underlying share price of the company had to be at least 25% above the strike price to provide a margin of safety.

The task at hand was to generate income that you could pocket by selling puts, not to buy shares in the company.

AMC Entertainment (AMC) was the first of three. I had two possibilities: 1) Jan. 19/2024 $2 put, and 2) Jan. 19/2024 $3 put. At the time, both expired in 217 days. That’s down to 15.

The former had an annualized yield of 16.5%, while the latter was 38.5%. Based on an underlying share price of $4.75 at the time, working backward, I get bid prices of $0.47 and $1.09, respectively.

As I said in June, I’m not particularly fond of AMC stock. It’s got way too much debt for a company with limited growth options (no pun intended!). However, as I said, its shares have rarely traded below $3 in recent years. I don’t think it ever has, so the margin of safety was good.

As I look at the two puts today, the $2 strike has a $0.00 bid price, while the $3 strike is $0.01. With 15 days to expiration and a share price of $5.43, the bet has paid off.

Put Option # 2 - Block

Of the three picks, Block (SQ) would be my preferred stock to buy for the long haul. Between Cash App and the Square ecosystem, CEO Jack Dorsey will continue to build a great business that meets the needs of consumers and companies worldwide.

In June, 31 analysts covered its stock, rating it 4.15 out of 5, with a target price of $87.64. Today, 38 analysts cover it with a Moderate Buy rating (4.24 out of 5), but with a target price of $10 lower at $77.31, just 13% higher than where it’s currently trading, down from 32% in June.

The put in question to sell at the time was the Sept. 15/2023 $47.50 put with a bid price of $1.03 and an annualized yield of 6.4% based on a $66.39 share price.

So, that pick came right down to the wire, closing Sept. 15 trading at $52.83, above the strike of $47.50. While you would have pocketed the premium income for an annualized yield of 6.4%, an expiry one week later would have meant buying the shares for a loss, even when subtracting the $1.03 premium.

On the bright side, as I stated in June, “Sure, it’s not anywhere near AMC's yield, but having to own the fintech stock isn’t nearly as repulsive as having to take possession of AMC shares.”

Should you have been required to buy the shares, your net price of $46.47 would have netted you a 48% unrealized gain over six months.

Not too shabby.

Put Option # 3 - Norwegian Cruise Line Holdings

My last pick was Norwegian Cruise Line Holdings (NCLH).

I've always had a love-hate relationship with cruise stocks. While they are environmental ticking time bombs, when pandemic-free, they are cash flow machines with considerable barriers to entry. The biggest threat to the cruise industry is sustained periods of higher interest rates beyond 2024.

While it doesn't look like that will happen, investors won’t know until the third or fourth quarter.

Over the past year, NCLH has delivered a 43% return, about one-third of Royal Caribbean’s (RCL) performance. As I said in June, I thought cruise stocks were a good buy (particularly RCL). I still do.

Cruise stocks should do alright in 2024, barring a hard landing or higher interest rates heading into 2025.

Anyway, the put selected in June was the Jan. 17/2025 $15 strike with a bid price of $2.19 and an annualized yield of 7.1% over the next 581 days (19 months). That’s not a massive return, but it's reasonable nonetheless.

The $15 strike was 22% lower than its $19.25 share price at the time. Today, the $15 strike is 16% below its share price of $17.82. With 379 days to expiration, anything can happen.

However, the net price you would pay should the shares be put to you next January is $12.81.

While it’s fallen hard early in 2024, down more than 10% in just three days of trading, if you have to buy the shares in a year, I believe you’ll be getting a bargain. That said, I don’t see that you will have to.

I’d say all three turned out to be excellent income plays. Even a blind squirrel finds a nut once in a while.

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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.