TradingTips.com

TradingTips.com

Unusual Options Activity: Bank of America (BAC)

Posted: 23 Sep 2019 03:00 AM PDT

Bet on drop in bank shares in next two years.

The January 2022 $30.00 put options on Bank of America (BAC) saw over 3,000 contracts trade against a prior open interest of 108, a 28-fold surge in volume.

With shares trading right around $30, the put option is at-the-money, can could move dollar for dollar with shares during a decline at any point before expiration in the next 851 days.

A trader making this bet may be hedging a large financial position, or betting on another potential meltdown in the sector in the next two years. Bank of America shares traded as high as $55 per share in 2006, before the last financial crisis, and dropped as low as $3 in early 2009.

Action to take: Banks are likely to struggle as interest rates decline, as their profitability will likely be squeezed. While a big bank like Bank of America may make up for some of those losses on trading volume, and some are bullish as a result, a slowing economy results in slower lending, the lifeblood of banking.

We like the at-the-money nature of this January 2022 $30 put option as a hedge against a market calamity. At $5.00, or $500 per contract, it's an inexpensive hedge against the overall market, or just the banking sector, that allows investors to hedge on the downside without having to sell their long positions.

 

McDermott Explores Sale of Lummus Technology

Posted: 23 Sep 2019 03:00 AM PDT

Company shares volatile on potential sale.

McDermott International (MDR), an infrastructure company, reports that it has received multiple unsolicited offers to acquire all or part of one of its divisions, Lummus Technology. The company values the division at $2.5 billion, and is a licensor of proprietary petrochemicals, refining, gasification, and gas processing technologies.

The company has hired Evercore to advise on how to process the offers. Shares of the company plunged 75 percent in the two trading days before the announcement, on fears of potential bankruptcy.

Selling the division would allow McDermott to pay down debt and raise cash. Shares initially popped 60 percent on the news of the potential sale.

Action to take: Shares of the company are still priced for bankruptcy, and anyone considering investing should be particularly cautious, as those fears have yet to be quelled, and might not be even if the division is sold and the company appears to have sufficient cash.

However, investors willing to accept the risk of bankruptcy may want to consider a stake under $3.00 per share. If the division is sold and the company continues, its backlog of infrastructure projects, particularly in the energy space, would justify a far higher share price, possibly as high as $10.

Speculators could buy January 2020 $5 calls on an expected further bounce in shares, as the risk/reward on that option looks attractive. Given how far shares have dropped, and how companies tend to trade with some value during bankruptcy proceedings, we see no value in put options.

 

Gordon Haskett Upgrades Costco

Posted: 23 Sep 2019 03:00 AM PDT

Investment firm sees strong earnings for retailer.

Gordon Haksett upgraded shares of Costco (COST), giving shares a price target of $330. That's well above the company's recent 52-week high of $307.

The investment firm cites the likelihood that the retailer will have an easy time beating estimates for earnings in the fourth quarter, and that the company will likely declare one of its periodic special dividends before year-end. Haskett adds to the list of investment analysts seeing shares likely to outperform in the coming months.

Shares of the retail giant trade at 31 times forward earnings, and shares have already risen 23 percent in the past year, about 20 points higher than the S&P 500 Index's return over the same time.

Action to take: We agree that Costco is a great company with a terrific management team and will likely continue to be a top performer. However, shares are pricey, and the company is ultimately a low-margin retailer that may be susceptible to changes in retail sales. While shares may have some more upside following their rollout in China, investors should wait until shares pull back to at or under $250 before buying.

Speculators may want to consider the April 2020 $300 calls, which trade for around $15, or $1,500 per contract. If shares rally to the Haskett price target of $330, these options could give traders a clean double.

 

Insider Activity: Destination XL Group (DXLG)

Posted: 23 Sep 2019 03:00 AM PDT

President and COO pick up shares at clothing retailer.

Harvey Kanter, President and CEO of Destination XL Group (DXLG), picked up 20,000 shares recently, increasing his stake in the company by 200 percent at a cost of $27,800.

He was joined by COO Brian Reaves, who bought 21,735 shares, increasing his stake by 19 percent, and who paid just under $30,000.

Other insiders have been buyers of the company in the past year, and zero insiders have been sellers.

Destination XL operates as a specialty retailer of big and tall men's apparel, with over 216 retail stores, 15 outlet stores, and other holdings. Shares are down 42 percent in the past year, and the company is currently unprofitable.

Action to take: While insider buying can generally be bullish, and while buys from a CEO are a more valuable indicator than from a director or lower-level employee, and while insiders at other men’s apparel groups have been buying, shares still look overvalued at these prices. Furthermore, a $30,000 buy isn't strong enough to justify buying shares here with the company's debt being four times the company's market cap.

We suggest investors consider a trade elsewhere, as shares will likely continue their long-term trend of declining. Speculators can buy put options on the company to bet on a further downside, but the options only go out to December 2019. Aggressive speculators may want to consider simply shorting shares outright.

 
Posted by: at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)