Unusual Options Volume for Jefferies Financial (JEF) Poses Questions

As an independent investment bank and financial services, Jefferies Financial (JEF) might not seem like a great investment at the present juncture. After all, with the benchmark S&P 500 dropping nearly 20% of value for the year, Jefferies’ core business of providing capital market and financial advisory services appears less relevant and pressing. Further, recent options activity suggests that investors may be losing confidence in JEF stock.

Still, on paper, Jefferies has been surprisingly robust. True, JEF stock did dip 12.5% for the year so far. Nevertheless, in terms of mitigating downside action, JEF conspicuously outperforms the benchmark equities index. In addition, the company delivered important financial results that helped keep the ship afloat (relatively speaking).

Primarily, in late September, Jefferies disclosed strong numbers for its third-quarter earnings report. Per Zacks Equity Research, the financial services firm “came out with quarterly earnings of $1.10 per share, beating the Zacks Consensus Estimate of $0.69 per share. This compares to earnings of $1.51 per share a year ago. These figures are adjusted for non-recurring items.”

On the top line, the company “posted revenues of $1.52 billion for the quarter ended August 2022, surpassing the Zacks Consensus Estimate by 16.43%. This compares to year-ago revenues of $1.94 billion.” While some elements can be nitpicked, overall, JEF stock offers much intrigue.

Indeed, Barchart contributor Mark R. Hake stated that Jefferies’ Q3 report “showed strong free cash flow and tangible book value. It now trades for less than 10x earnings and a 3.83% yield, making JEF stock appealing to value buyers.” To help affirm the bullish angle, JEF gained over 25% of equity value in the trailing six months.

Nevertheless, in the trailing one-month period, JEF stock slipped 9%. Subsequently, the bearishness may have attracted unwanted attention in the derivatives market.

Put Options on JEF Stock Light Up the Board

Following the close of the Dec. 29 session, JEF stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Traders usually advantage this information to determine which stocks may be due for big moves ahead.

Specifically, JEF’s volume level reached 4,943 contracts against an open interest reading of 9,503. Call volume hit 25 contracts versus put volume of 4,918. Further, the delta between the trailing-month average total volume versus the Thursday session volume came out to 556.44%. The implied volatility (IV) rank hit 34.77%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for JEF stock was 26.63% on Aug. 15, 2022. Several months earlier on March 7, JEF hit its IV high at 53.45%. Prospective investors should note that per Barchart.com’s technical analysis gauge, JEF ranks as an average 56% buy. JEF’s medium and long-term indicators generally rate bullishly, while its short-term indicator points to a somewhat pensive sentiment.

Interestingly, at time of writing, most covering analysts maintain an optimistic view regarding JEF stock. Recently, though, this consensus opinion waned slightly. Three months ago, Wall Street experts rated Jefferies as a “strong buy,” breaking down as two strong buys and two moderate buys. In the current month, JEF is a consensus “moderate buy” – two strong buys, one moderate buy and one hold.

Presently, JEF stock features a 60-month beta of 1.39, which is noticeably more volatile than the benchmark equities index. Thus, prospective investors should exercise caution.

A Difficult Narrative Ahead

Fundamentally, it’s not difficult to see why some folks may have a dim view on JEF stock. On the advisory side, the erosion of market sentiment leaves few long-side opportunities available. For instance, Barchart.com’s industry heat map shows that only 12 sectors enjoyed a positive return on a year-to-date basis.

Assuming I didn’t miscount, there are 187 sectors that Barchart covers. When only a little more than 6% of all industries provide upside returns, that’s not a great environment for advisors.

And it doesn’t get much better on the capital markets side. Following a record year in terms of initial public offerings in 2021, this segment dried up badly in 2022. According to FactSet, “1073 companies IPO’d in 2021, raising $317 billion; in the first half of 2022, the total was just 92 companies, raising just under $9 billion.”

On the more optimistic front, a bear market cycle separates the wheat from the chaff in the financial advisory world. In other words, during decisively bearish phases, a dart-throwing monkey may appear prescient. However, it takes true genius to figure out which assets will rise when global markets are tumbling.

Admittedly, though, this is a contested argument. If you decide to partake in JEF stock, periodic nibbling may be superior to an all-in wager.

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