Unusually Heavy Volume in Snowflake Call Options Ahead of Earnings Today

Snowflake Inc. (SNOW) call options saw unusually heavy volume today at a strike price higher than today's price and expiring in 9 days. That could signal either bullish sentiment or existing investors selling covered calls for extra income.

SNOW is trading at $306.92 in midday trading, down about 4% on the day. It's off from a recent peak of $337.38 on Aug. 13, but well up from a recent trough of $265.13 on July 23.

Is this going to be another case of “sell on the news?” If so, that could account for the unusually out-of-the-money (OTM) call option selling today.

That can be seen in today's Barchart's Unusual Stock Options Activity Report. It shows that over 8,500 call options have traded at the $360 strike price expiring on Sept. 11, or 9 days from now. 

This heavy volume in SNOW call options is almost 19x the prior number of call options outstanding for Sept. 11 at $360.00.

Moreover, that strike price, almost 15% above today's price, is even higher than the stock's recent closing peak at $337.38.

So, these investors are either super bullish (i.e., they expect a massive leap in SNOW stock), or they are selling covered calls or a related spread to take advantage of the high call option premium.

For example, the $4.37 call option premium (that buyers paid, but sellers received) represents 1.42% of the stock price ($306.92) over the next 9 days. Think about that. If an investor can repeat this play every 9 days for a quarter (i.e., 90 days), the expected return is 14.2% (10 x 1.42).

So, no wonder short-call investors are happy to take advantage of this income. But could SNOW rise 15% over the next 9 days?

Higher Revenue and Earnings Forecasts

Analysts expect Snowflake, a software database company benefiting from the AI buildout boom, to make $1.48 billion in fiscal Q2 revenue as well as 45 cents in normalized earnings per share (EPS).

That would represent an increase of 6.47% over last quarter's $1.39 billion in revenue and 15.4% over Q1 EPS of $0.39. So, any top line numbers over these projections could push SNOW higher, especially if they forecast even higher growth for the rest of the year.

In addition, Snowflake has already forecasted its own adjusted free cash flow (FCF) margin for this year (ending Jan. 31, 2027) of 23%. Snowflake is one of the few companies that provide this kind of guidance. It shows strong confidence in its customer revenue and resulting cash flow.

In Q1, it generated a 19.1% adj. FCF margin, according to its own calculations, slightly lower than last year's 20% adj. FCF margin. However, in Q2 of last year, its adj. FCF margin was just 6%, so any number this year in Q2 above that will be considered an outperformance.

However, the vast majority of its annual adj. FCF comes in during the fourth quarter. For example, in Q4 last fiscal year, it generated $782 million of its total $1,193 million in adj. FCF. That is because most of its clients renew their annual software subscription during the three months ending Jan. 31. 

Moreover, the Q4 adj. FCF margin was 61%. The bottom line is that Snowflake's 23% margin forecast (although lower than last year's 25% margin) mostly occurs during Q4. So, the Q2 number won't affect it too much.

Higher Price Targets and Conclusion

Analysts have higher price targets for SNOW stock. For example, Yahoo! Finance's survey average is $331.66, or 8% higher. Similarly, Barchart's mean analyst survey price is $329.33, and AnaChart's survey of 31 analysts has an average $309.12 price target.

Note that these price targets are well below the $360 call option strike price. That shows that some investors believe these analysts are wrong and SNOW could fly after earnings.

If Snowflake can report higher-than-expected numbers, and more importantly, if it increases its adj. FCF margin guidance for this fiscal year, that could push SNOW closer to this strike price.

However, the most likely explanation is that some investors are taking advantage of this high strike price. These investors are happy to short the high $360 call option strike price with the 1.42% covered call premium, or a similar call credit spread income.