This Week’s Unusual Options Activity Involves 3 Losers

Each week, I like to look at the companies whose unusual options activity is screaming buy this stock. Whether you’re purchasing 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. 

On Friday, June 24, I thought I’d focus on the unusual options activity of stocks in three of the worst-performing sectors of the S&P 500 through the first half of 2022. 

According to Yardeni Research, the three worst-performing sectors of the S&P 500 are Consumer Discretionary (down 31.0% through June 23), Communication Services (-$29.4%), and Information Technology (-26.3%). 

I’ll pick one call option contract per sector. Here are my three selections.  

Consumer Discretionary - Funko (FNKO)

It’s been a long time since I’ve written about Funko (FNKO), a toy company based in Washington state. Last August, it jumped into the wild and wooly world of NFTs (non-fungible tokens), launching its first set of Funko Digital Pop! Packs. 

Funko announced it was partnering with Hasbro (HAS) to sell 360,000 My Little Pony Digital Pop! NFTs on June 28, selling packs between $9.99 and $29.99. They will be available for purchase through Funko’s Droppio.io NFT platform. In March, they dropped the same amount for Hasbro’s Transformers brand. Since the beginning of 2022, it’s done 16 of these Digital Pop! NFT launches. 

On June 13, Funko announced it would acquire Mondo, a company owned by Alamo Drafthouse that produces vinyl records and posters collectibles focused on the music and film industries. No terms were announced, but it’s not material to the company’s 2022 financial performance. 

With more than $1 billion in sales in 2021, 75% of which was generated in the U.S., Funko has plans to diversify its revenue streams while also growing its international business. NFTs are expected to be a big part of this growth. 

Funko’s Nov. 18 $30 call is currently 22% out-of-the-money with 147 days until expiry. Its bid price of $2.10 implies that FNKO must reach $32 to break even. The current volume of 647 is 2.14x the open interest. 

Communication Services - AT&T (T)

I’ve never been a fan of AT&T (T) because of the debt it carried. After spinning off its WarnerMedia subsidiary, the company returns to being the nation’s largest wireless carrier, hopefully, a business that knows how to stay in its lane. Acquisitions outside its core competence aren’t recommended. 

Inflation is forcing the company to raise prices. In May, it raised prices by as much as $6 per month for individuals and $12 for families. Things have gotten so bad that the company’s involuntary churn is back to pre-pandemic levels. 

While customers have been relatively resilient to price increases, they’re not likely to be nearly as patient this time.  

“As I look at the inflationary expectation over the next several quarters, it’s hard for me to envision that that’s not going to impact the consumers negatively,” AT&T CFO Pascal Desroches said in mid-June. “We and others will see some pressure.”

Interestingly, John Oliver, the star of HBO’s Last Week Tonight, recently made fun of the post-monopoly AT&T, suggesting it is unrecognizable today from the efficient and quality business that existed before it was broken up in 1982.

Despite its questionable business practices, AT&T is primed to generate billions in revenue and free cash flow. In the trailing 12 months, AT&T’s free cash flow was $20.52 billion. That’s a free cash flow yield of 13.7%. I consider anything above 8% to be in value territory. 

As for AT&T’s unusual options activity, its July 22 $ $22 call has a volume of 3,547, 3.37x its open interest. Expiring in 28 days, it is almost 6% out-of-the-money with a bid price of $0.14.   

Information Technology - Nice (NICE) 

Nice (NICE) is an Israeli-based provider of enterprise software for the customer engagement and financial crime & compliance markets. Although it’s been in business since 1986, its business got going in 2016 when it acquired inContact, a cloud contact center software provider. 

Today, it has over 27,000 customers, including 85% of the Fortune 100. Doing business in more than 150 countries generated $2.0 billion in revenue for the 12 months ended March 31, 2022. Approximately $1.1 billion was cloud-based revenue. 

Over the past three years, the company’s revenue grew 22.3% to $1.92 billion in 2021 from $1.57 billion in 2019. In terms of profits, its operating profit rose 10.6% to $263.9 million from $238.7 million a year earlier.

Nice currently trades at 6.74x sales, considerably less than Five9 (FIVN) at 10.03x.

The company’s Aug. 19 $230 call currently is 12.2% out-of-the-money with 56 days left until expiry. The call contract volume is 883, 2.46x its open interest, with a bid price of $2.90.

Of the three call options, I would say Funko’s Nov. 18 $30 call has the best bet of paying off for options investors because it has an optimal amount of days until expiry relative to its bid price. 

Happy Investing!

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