Why Unusual Options Volume for Lemonade (LMND) Might Identify an Opportunity

Although it’s impossible to solidify the broad range of opinion for insurance technology specialist Lemonade (LMND), the consensus may be that the business itself is intriguing. By streamlining insurance services through a quick and convenient app, Lemonade aligns with the sensibilities of millennials and Generation Z. However, the broader financial technology sector hasn’t exactly provided much confidence for LMND stock.

Indeed, in most longer-term contexts, LMND stock appears a terrible investment. In the trailing six months, for example, shares gave up over 21% of equity value. In the trailing year, they slipped more than 36%. And since making its public market debut in 2020 – during the midst of peak coronavirus fears – Lemonade veritably cratered, bleeding out to the tune of 73.55%.

With other names in the broader financial technology sphere not faring much better, skepticism arises quickly regarding the bullish potential of LMND stock. Piper Sandler (PIPR) analyst Arvind Ramnani may have summed up Lemonade the best, who lowered his price target to $19 from $20.

Although Ramnani remains optimistic about Lemonade’s core product, he states 2023 may be a transition year. Essentially, management will focus on cross-selling insurance products and boosting profitability. In other words, Lemonade has the right idea – delivering critical services in a platform young consumers understand. However, the execution is off.

Moving forward, Lemonade needs to focus more on the insurance component of its business and less on the technology. That’s not to say that the tech isn’t important. However, insurance firms – at least the good ones – tend to be profitable enterprises. On the other hand, Lemonade is deeply unprofitable.

Even more problematic, its losses per share have generally expanded unfavorably since the fourth quarter of 2020. Therefore, it’s not shocking that many investors approach its next earnings disclosure – scheduled for Feb. 22 – with trepidation. Nevertheless, activity in the derivatives market suggest brewing optimism for Lemonade.

Unusual Options Volume Puts Spotlight on LMND Stock

Following the close of the Feb. 3 session, LMND stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This stat shows the difference between the current volume and the average volume over the past month. Typically, traders utilize this data to determine which stocks may be due for big moves ahead.

Specifically, LMND’s volume level reached 11,230 contracts against an open interest reading of 63,068. Call volume hit 9,548 contracts versus put volume of 1,682. Further, the delta between the trailing-month average total volume versus the prior session volume came out to 218.22%. The implied volatility (IV) rank hit 31.93%, 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 LMND stock was 69.58% on Dec. 2, 2022. Almost a year earlier on Feb. 23, 2022, LMND hit its IV high of 140.34%. Prospective investors should note that per Barchart.com’s technical analysis gauge, LMND ranks as an average 56% sell. Although somewhat contested, the overall sentiment for shares leans decisively toward the bearish end.

In addition, analyst sentiment effectively rides the fence. Three months ago, Wall Street experts pegged LMND stock a “hold,” breaking down as two strong buys, four holds and two moderate sells. In the current month, the consensus remains the same. However, one fewer strong buy rating exists.

Finally, LMND’s 60-month beta sits at 1.57, reflecting higher volatility than the benchmark equities index. That’s not surprising given how much shares tumbled since its public debut.

Focus on the Inelasticity

To be sure, the once-promising fintech angle now seems like a burden for investments like LMND stock. For instance, Opendoor (OPEN) represented an enterprise that promised to revolutionize the way people conducted real estate transactions. Although OPEN managed to post a blistering performance this year, market participants can’t lose sight of the fact that it imploded since its initial public offering.

Fundamentally, though, what separates Lemonade from Opendoor is demand inelasticity. In other words, while buying a house doesn’t necessarily represent a need (since people can always choose to rent), insurance is vital. Whether you buy a home, a car or bring home a pet into your life, insurance is a must-have since the risk of financial catastrophe is too great a burden.

That’s not to say that LMND stock is going to be an easy investment. Quite the contrary, it’s a high-risk wager. However, it also provides a critical service. Combined with how much millennials and Gen Z use their smart devices, Lemonade is a solid bet for the segment of your portfolio earmarked for speculation.

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