Unusual Options Activity: 3 Companies Whose Stocks Have Seen Better Days

I jumped on my computer Friday to find some trends to write about for my latest edition of Unusual Options Activity. Nothing initially grabbed my attention, but then I realized three call option contracts were exhibiting above-average activity with share prices traded in single digits.

All three of the companies behind the call options have seen better days. 

While I’m not sure I’d bet on any of the three over the long haul, the call options are attracting attention from investors. 

Here’s how I view each of the companies and their stocks.

Transocean

Transocean (RIG) once traded for more than $150 -- May 2008, to be precise -- but today, it’s a penny stock, trading under $5 since the beginning of June. 

The call option I’m looking at is the Jan. 19/2024 $2.50 contract. It’s currently just 6.4% out-of-the-money with 483 days till expiry. That’s a lifetime in options markets. Almost halfway through the trading day, its volume of 1,813 is 1.8x the open interest, with an ask price of $0.80. 

On the one hand, an $80 premium for a hold of approximately 15 months seems like a sweet deal, but when you consider that it’s one-third of the current stock price, that’s a big ask. 

If you genuinely believe Transocean is making a comeback, you’d be better off just buying the stock at $2.35 and calling it a day. 

What the heck happened to Transocean? 

Once upon a time, it was one of the most prominent players in offshore drilling. If you believe the company’s investor relations site, it still is the “global leader in offshore drilling.”

As I look at its latest quarterly report, the company’s business doesn’t look too bad. Revenues in the first six months were down slightly to $1.28 billion with adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $408 million, 18.4% less than a year earlier.

However, three issues hold its share price back.

First, the average daily revenue for its fleet is $346,800, 6.6% lower than a year ago. 

Secondly, that average wouldn’t be so egregious if it fully utilized its fleet of rigs. It was 55.4% in the first six months, 160 basis points higher but considerably lower than its 90% rate in 2008, the year it hit $150. 

Lastly, its long-term debt ($6.38 billion) is 31% of its total assets and 354% of its market cap. Its interest expense through Q2 2022 was $202 million, less than a year earlier, but an actual noose around the company’s neck.

If you can’t make money at a time when oil companies are rolling in cash, I’m not sure you ever will.

Pitney Bowes

A long time ago, Pitney Bowes (PBI) was the king of the corporate mailroom. The company’s postage meters were a must for any high-volume organization. Today, I honestly couldn’t tell you what the company does to keep the lights on. 

In late July, PBI issued a press release announcing the company’s Designed Delivery service was expanding into the Canadian market. As I’m Canadian, this news sparks my interest.

"The new service will help Canadian brands and retailers optimize delivery speed, and shipping costs both domestically and to the US. Built on decades of experience working in the Canadian market and helping US and UK retailers reach Canadian consumers,” Pitney Bowes stated in its July 25 press release.

The key to a successful business idea is delivering a product or service that makes or saves people time or money. So, it’s got a shot if it genuinely can save Canadian businesses money on their e-commerce fulfillment. 

However, as I look at its Q2 2022 results, I don’t see anything that screams success. Two out of three of its operating segments: Global Ecommerce and SendTech Solutions, had declining year-over-year sales in the quarter, while its Presort Services grew by just 3%. 

Further, its operating income declined 79% to $4.34 million. That’s an operating margin of less than 1%. Grocery stores do better than that. 

The Jan. 20/2023 $3 call contract expires in 119 days. It’s currently 23.0% out-of-the-money with an ask price of $0.30, about 10% of its share price. That’s a little more reasonable than Transocean’s.

Pitney Bowes’ latest news about its Canadian business is not a reason to buy PBI stock for the long haul. That said, a $30 bet on its $3 call isn’t going to break you if you’re an aggressive investor.

First Majestic Silver

I’ve never been interested in gold or silver investments. That doesn’t mean I shouldn’t discuss First Majestic Silver (AG) and its Nov. 18 $7 call contract. Volume is almost 10x the open interest at the moment. Somebody’s interested.

The call is barely out-of-the-money with 56 days to expiry. Including the $0.67 ask, AG stock needs to rise about 13% over the next two months for you to break even on the contract. As recently as June 2021, First Majestic traded near $18. It’s lost two-thirds of its value since. 

First Majestic’s investor relations site points out that 52% of silver consumption is from industrial applications such as water purification, window manufacturing, etc. Jewelry and silverware account for another 23%, and silver coins and bars account for the rest.

Furthermore, the greener our economy gets, the greater the demand for silver. The market for First Majestic’s production is enormous between solar power and electric vehicles. 

The big question is whether First Majestic is the silver producer you should invest in.

Well, it’s important to note that First Majestic produces silver and gold. Production is about 50/50. In 2021, it didn’t make the top 10 for silver production. In 2022, it expects to produce at least 11.2 million ounces of silver from its three Mexican mines and at least 256,000 ounces of gold, with 38% produced in Nevada and the rest in Mexico.

In Q2 2022, production was 7% higher than a year earlier, offset by a 10% drop in average realized silver prices during the quarter.  Silver’s heyday in recent years was in 2011, when it sold for nearly $50 an ounce. Today, it’s 59% less. 

The bet is that solar and electric vehicles will come through and the price will return to 2011 levels. That’s unlikely to happen anytime soon. That said, it’s trading very close to a 52-week low. 

Of the three call options, this is the stock I’d bet on, despite the fact I’m not a silver bug.

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