Unusual Call Option Activity in CVS Ahead of Its Earnings Shows Investors are Bullish

Today, a Barchart report shows unusually heavy call options activity in CVS Health Corp. (CVS) stock. This highlights bullish moves by some investors ahead of CVS's pre-market earnings on May 6. 

CVS is trading up today at $81.23. It's been volatile over the last 6 months, as the Barchart chart below shows. Investors seem to waver between a bullish and bearish outlook.

Note that CVS stock is well up from its recent lows at the end of March, but it's still below its $83.87 peak price on January 26. However, today's options activity implies CVS stock will rise over that peak.

Unusual Call Options Activity in CVS Stock

The activity in CVS call options is seen in today's Barchart Unusual Stock Options Activity Report. The CVS call option activity is at the top of that Activity Report. This could imply that institutional investors are taking positions ahead of earnings.

For example, the report highlights the $84.00 call option strike price for the contract expiring May 1 (this Friday). It has seen unusually high volume, over 47x the prior number outstanding.

The activity implies that some buyers expect CVS stock to climb over $84.00, plus the premium (20 cents), or $84.20, by Friday. That would be a +3.65% move upward in CVS stock over the next three and a half trading days.

Note that the delta ratio is only 0.14, implying a low probability that CVS will reach this strike price. But, keep in mind, this is not set in stone - it's only a probability factor based on past volatility.

Nevertheless, sellers of these calls are only making a 0.246% yield (i.e., $0.20/$81.23) over the next 3 days. Monthly, if this play was repeated every week, the yield is about 1.07% (i.e., 0.246% x 4.333 wks/mo = 1.065%).

So, there seems to be a good yield for short-sellers or covered call sellers of CVS stock.  Both of these seem to imply that there is a bullish outlook on CVS stock.

And, for good reason, since CVS does not seem overvalued.

CVS Valuation and Price Targets

For example, CVS Health Corp. stock trades on a forward price/earnings ratio (P/E) of just 11.34x this year's expected EPS ($7.16, according to Seeking Alpha), and 9.93x next year's EPS ($8.18). 

So, the next 12 months (NTM) average P/E ratio is 10.64x.

This is close to its historical forward P/E ratio average. According to Morningstar, its 5-year forward P/E has been 9.83x and 10.33x, according to Seeking Alpha.

Moreover, analysts' price targets (PTs) are significantly higher than today's price and even the call option strike price.

For example, Yahoo! Finance reports that the average PT from 27 analysts is $96.58. That's 19% higher than today's price and about 15% higher than the $84.00 call option above.

Similarly, Barchart's mean survey PT is $94.96, and AnaChart's survey of 17 analysts who've written recently about CVS is a PT of $94.23.

So, analysts all seem to agree that CVS stock looks undervalued. 

The bottom line is that based on its metrics and analysts' recommendations, CVS stock has room to move up. That could account for some of the huge call options activity today.