HP Inc. Has Unusual Call Options Volume Today - Investors Bullish on HPQ Stock

HP Inc. (HPQ) reported strong revenue and free cash flow last week and announced a new AI-compatible PC product line today with Nvidia (NVDA). This is making investors bullish on HPQ stock, spurring huge, unusual call option volume.

HPQ is up over 7% today at $29.33 in midday trading after today's news. The stock has risen over 40% since May 14, when it closed at $20.77, before its May 27 fiscal Q2 earnings release.

Moreover, it could have more to go, based on analysts' revenue projections and its strong FCF margins. That could be why investors are piling into near-term HPQ call options today.

This can be seen today in Barchart's Unusual Stock Options Activity Report. It shows that almost 90 times the normal number of calls have traded for the July 17 expiry period at the $35.00 call option strike price.

This date is 44 days from now, implying investors initiated these call trades as purchases. Moreover, the call option premium is not high - just 92 cents. So, the breakeven price is $35.92, or +23.2% higher than today's price.

Buyers of these calls believe HPQ could reach this level over the next month and a half. Sellers are making a small covered call yield over 3%

  $0.92 /$ 29.33 = 0.0314/100 = 3.14%

They can also make money if HPQ rises to this strike price, for a total potential return of 23.18% (i.e., $35.92/$29.16-1).

The point is that investors are now heavily bullish on HPQ stock. Let's look at why.

Strong Free Cash Flow Expected

Today, HP Inc. announced it is teaming up with Nvidia to produce an AI-compatible or energized PC product line. That could help push revenue and FCF up much further, after its strong May 27 FY Q2 earnings release.

The company made 9% higher revenue and from this generated $756 million in free cash flow (FCF) last quarter. That was after a negative $145 million FCF last Q2. 

Moreover, its trailing 12-month (TTM) FCF was $3.779 billion, according to Stock Analysis, representing a huge 6.58% FCF margin. That was even higher than last quarter's TTM FCF margin of 5.12% and the prior year's TTM FCF margin of 4.90%.

In other words, as sales rise, its ability to squeeze out cash flow is increasing. That means with today's news that if its new product line accelerates its revenue growth, FCF margins could increase.

For example, analysts now project revenue this year ending Oct. 2026 will be $57.75 billion. Assuming it can generate a 6.6% FCF margin:

  $57.75b x 0.066 = $3.81 billion FCF

If sales next year rise by another 9%, and its margin rises to 7.0%, FCF could hit $4.4 billion:

  $62.95 billion x 0.07 = $4.40 billion FCF

This could push HPQ stock significantly higher.

HPQ Price Targets

HPQ has 914.5 million shares outstanding. That means its market cap is:

 $29.33 x 914.55m shs = $26.83 billion market cap

That means its trailing 12-month (TTM) FCF of $3.78 billion represents a FCF yield of 14.09%. That is extremely high. Many tech firms have FCF yields significantly lower than this.

For example, using a 10% FCF yield metric, and assuming a $4 billion next 12-month (NTM) FCF forecast:

  $4.0b / 0.10 = $40 billion

That is 49% higher than today's market cap, even after its huge rise.

This implies the price target is $43.70 per share.

Summary and Conclusion

That could be why investors are piling into HPQ's call options today. Investors expect that the $35 call options will have at least $8.70 in intrinsic value (i.e., $43.70 - $35.00). 

That is 9.5x times the 92 cents being paid for these calls. Of course, this assumes HPQ will rise to this NTM price target in the next 46 days. That may not occur in this time frame.

As a result, investors should be careful copying this trade, as there is a high degree of risk.