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Investors have shorted a huge volume of Snowflake, Inc. (SNOW) put options that expire at the end of 2027 at a strike price 50% below today's price. They gain a 10% yield for 1.37 years away - a very bullish play in SNOW stock.
SNOW is trading at $316.98 today, ahead of earnings due on Sept. 2. The stock has been steadily moving higher as the chart below shows.
So why are investors piling into SNOW puts with a $160 strike price, 50% below today's price, expiring on December 17, 2027 (499 days from now)?
It almost makes no sense, especially since the company is at the heart of the AI investment boom and has been consistently profitable.
This trade can be seen in today's Barchart Unusual Stock Options Activity Report. It shows that over 64 times the prior number of put options have traded at the $160 strike, with over 9,000 put contracts traded.
The premium for this trade was $16.25. That means a short-put investor, who likely initiated this trade, can do the following:
Post $16,000 with their brokerage firm
Enter an order to “Sell to Open” 1 put for expiry on Dec. 17, 2027 at $160
The account will then immediately receive $1,625. So, the investment yield for the next 16.4 months (i.e., 499 days) is:
$1,625 / $16,000 = 10.156%
As a result, the short-put investor makes an annualized expected return of 0.61928% per month or 7.431% annually.
Moreover, the breakeven point is much lower: $160 - $16.25 = $143.75, or 55% below today's price.
So, is SNOW likely to drop 55% in the next 16 months? Not likely.
Why Do This Trade?
Analysts have average price targets of $302.29 for SNOW stock, which is only slightly lower than today's price. But, the company is generating strong free cash flow (FCF) and is in no need of any kind of capital raise, and its capex is not likely to spike higher, as with the hyperscalers.
In fact, last quarter (Q1) its FCF at $232.77 million was up 26.9% YoY and represented 16.7% of revenue.
However, that was significantly lower than the prior quarter ($765.09 million). So, investors willing to buy these puts may think this weakness will continue.
But that is not likely. For example, over the past year, Snowflake generated $1.17 billion in FCF, which was higher than the prior quarter's $1.12 billion trailing 12-month (TTM) FCF.
Moreover, that Q1 TTM FCF represented over 54% of TTM revenue.
Last quarter's drop was likely due to seasonal issues. Don't count on a 50% drop in FCF for Q2.
In other words, fears about SNOW stock falling over 50% in the next year seem overdone. That makes shorting these puts a very profitable potential play, earning over 10% in expected return for a long-term value investor.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
