Unusual Options Activity for Nike and DraftKings

It’s become commonplace today for institutions to use options to take long-term positions in stocks they like. As a result, some investors use unusual options activity to spot whales taking big leveraged bets on companies they want to own. 

Some would say this is one way to follow the smart money. Just as other investors scour 13F forms to see what billionaires and big money management firms are buying, tracking unusual options activity can unearth stocks that are ready to make a big move. 

I’m a fundamental investor so I’ve never been much for the options market. However, at the end of the day, whether you’re buying the underlying shares of a company or a call option to buy some in the future, it all boils down to fundamentals. 

Some companies have them and some don’t. These three stocks have them in spades while also attracting higher than normal investor interest. That’s a potentially potent combination.

Nike (NKE)

It’s only fitting that Nike is on my list of three stocks to buy showing unusual options activity on April 14. The Final Four is in the rearview mirror and the NBA playoffs begin this weekend. Nike supplies a lot of the players’ shoes. 

Nike generated $1.7 billion in basketball revenue from its Nike brand in fiscal 2021 (May 31 year-end). Its Jordan brand had sales of $4.7 billion in the past year, a 32% year-over-year increase. Together, that’s 18% of Nike’s $35.8 million in wholesale revenues, which increased by 17% in 2021.    

From a profit standpoint, Nike’s 2021 results were exceptional. Its return on invested capital in the past year was 48.8%, more than double 2020. Through the first nine months of fiscal 2022, its sales and net income rose 7% and 9%, respectively.  

The latest quarter from the company indicates that its Nike Direct strategy is working. Nike Direct’s sales in Q3 2022 were $4.6 billion, 17% higher on a currency-neutral basis. They now account for 42% of Nike’s sales, up from 38% a year earlier.    

On the options front, the September 2022 $135 calls traded on April 14 with implied volatility (or IV) of 32.16, 109 basis points higher than its average IV. The September $135 calls had 2,929 contracts on the day, almost nine times the open interest. 

Trading near the money, its 14-day RSI is 53.04. Anything below 30 is considered oversold and anything above 70 is overbought. Nike is right in the middle suggesting now would be a good time to buy its stock if you’re looking for fair value and long-term hold.

System1 (SST)

I had never heard of System1 until I did a screen to find some stocks with high call-option volumes on the day. As I write this on April 14, the August 2022 $12.50 calls have a volume-to-open-interest ratio of 13.51. A total of 1,500 contracts have traded on the day compared to open interest of 111. 

Trading well into the money, its 14-day RSI is 57.11, which isn’t half bad when you consider that its stock is up more than 114% year-to-date. 

It turns out that you can make money from special purpose acquisition companies (SPACs). System1 merged with Trebia Acquisition Corp. on Jan. 27. Trebia is one of the many SPACs from William Foley II, the man behind several successful public companies including Fidelity National Financial (FNF), Fidelity National Information Services (FIS), and Cannae Holdings (CNNE) to name a few. 

Foley is a hound for deals. One might think that SPACs were created solely for him. 

As for System1, it has created a proprietary omnivertical and omnichannel Responsive Acquisition Marketing Platform (RAMP) that allows the company to help its advertising partners monetize their brands. The U.S. digital advertising market is expected to grow from $150 billion in 2021 to $278 billion in 2024. 

In early April, System1 reported full-year 2021 results that included a 47% increase in revenue to $833 million and a 103% jump in adjusted EBITDA to $127 million. In 2022, it expects $1 billion in revenue and $174 million in adjusted EBITDA.

It’s clear by some of the company’s call option volumes, that investors believe System1 has more gains ahead of it.        

DraftKings (DKNG)

I included the sports-betting company on this list despite the fact that it’s losing a ton of money at the moment. In 2021, it had an operating loss of $1.54 billion from $1.30 billion in sales. Its operating loss was almost double what it was a year earlier.

The losses are a big reason Kynikos Associates founder Jim Chanos has a large short position in the stock.  Chanos believes that the company’s business model is flawed so it will likely continue to lose money. So far in 2022, the company’s estimate for its EBITDA loss this year has grown by almost double to $900 million. Chanos believes things are only going to get worse for it. 

As for the shorts like Chanos, Barron’s says that DraftKings had 39.44 million shares short as of March 31, accounting for 11.71% of its float. Considering the top short based on a percentage of float right now is MarketWise (MKTW) at 50.01%, DraftKings has a long way to go before it’s in the short-seller crosshairs. 

In the meantime, the company has a lot of irons in the fire, and those should bear fruit down the road. That said, there’s no question it’s a volatile stock to hold in uncertain economic times.

Analysts aren’t nearly as pessimistic as Chanos. Of the 30 covering its stock, 15 think it’s a Buy, one has it at Overweight, and 14 rate it Hold. The average 12-month target price is $33.48, 104% higher than where it’s currently trading.

As for the options activity, April 14 trading saw a contract volume of 27,258 for the July 2022 $20 calls, more than 15x the open interest. Someone is betting that DraftKings will go on a run in the next three months. 

It remains a stock better suited to aggressive investors who’re comfortable with above-average risk. However, the risk-to-reward proposition for speculative investors is reasonable given the future of sports betting in this country.