Buying call options is a lot like (American) football. Sometimes, you run the ball up the middle. And sometimes, you do a misdirection and run a bootleg.
At their core, call options represent a mixture of speculation on time value and intrinsic value. Knowing which one to deploy depends on myriad factors, including confidence in analysts’ price targets and the math that the particular derivatives market is giving you. Frankly, some markets will be more robust than others, thus necessitating a shift in strategy.
For this article, we’re going to assume that you already did your due diligence and are interested in the companies listed below. Here, the focus will be on finding not the cheapest option outright but the lowest-cost ideas that should net you a profit based on Wall Street’s guidance.
Without further delay, let’s dive into compelling call options.
CoreCivic (CXW)
For those interested in private prison CoreCivic (NYSE:CXW), investors may want to consider the CXW Dec 20 ’24 15.00 Call. Among all the ideas that pinged in CXW’s unusual options screener, the $15 call – which expires on Dec. 20 – is arguably the most viable.
That’s because analysts rate shares a unanimous strong buy with a $17.33 average price target. Around December, it’s quite possible that CXW will trade for around $16.88. If it turns out that the security reaches this price earlier than December, we should be golden. With a Friday closing price of $2.28 and only a bid-ask spread of 9.09% (as represented by the midpoint price), the contract could carry a high premium.
Further, political forces could also favor CoreCivic, especially if the polls suggest that former President Donald Trump is winning voters with his law-and-order message. Thus, a combination of outside fundamentals and an intriguing price point makes this one of the call options to consider.
Fusion Pharmaceuticals (FUSN)
As one of the lesser-known entities, Fusion Pharmaceuticals (NASDAQ:FUSN) doesn’t exactly have the most robust derivatives market. However, it happens to be one of the more popular entities, with FUSN gaining almost 47% on a year-to-date basis. If betting on shares in the open market seems risky, then call options may be the way to go.
In my opinion, the FUSN May 17 ’24 7.50 Call makes the most sense. Sure, at first glance, the option might seem expensive. On Friday, the contract closed at $5.20. Multiply this figure by 100 shares and you get the total premium, $520. Further, if you exercise the contract – that is by 100 shares at $7.50 – the total cost of the option comes out to $1,270.
Here’s the thing. On average, analysts project shares to hit $14.75 by February 2025. Around May when the contract expires, shares could land at $13. Thus, because you would have 100 shares following the exercise, a worst-case scenario assuming a linear extrapolation of analyst targets would have you taking home profits at $30.
Chefs’ Warehouse (CHEF)
While the rest of the market sold off last Friday, Chefs’ Warehouse (NASDAQ:CHEF) popped sharply higher. If you anticipate that the rally can continue, you have two viable choices. One involves a classic run-up-the-middle play and the other is the equivalent of a bootleg.
First, let’s talk about the CHEF Dec 20 ’24 25.00 Call. At first glance, this contract might appear off-putting considering that the time-of-writing price of CHEF in the open market is $37.01. With a strike price of $25, the premium lands at $13.65. Multiply this figure by 100 – and assume the exercise of the call – and the total bill comes out to $3,865.
That’s pricey. However, based on analysts’ average price projection, by December, CHEF could hit $44.92. If so, based on purely intrinsic value and no time value, you’d have a profit of $627. To use the football analogy, the premium for the lower strike price is the bruising fullback.
However, if you’d rather have the lowest price possible for a viable trade, the out-of-money (OTM) Jul 19 ’24 40.00 Call was priced at $2.57 on Friday. By expiration, it’s possible that CHEF could be near $41, making it one of the intriguing call options.
Vale (VALE)
For Brazilian multinational metals and mining firm Vale (NYSE:VALE), two options present an intriguing idea. First, as a classic run-up-the-middle play, I’d look at the VALE Jan 17 ’25 5.00 Call. Yes, the security closed at $13.63 in the open market on Friday. So yes, the premium is hefty, $8.70 at Friday’s close. Combined with the exercising of the contract, you’re looking at a complete cost of $1,370.
However, based on analysts’ average price target, VALE stock may land at $17.81 by the January expiration date. Should you find yourself just with intrinsic value and no time value, you can still collect a profit of $411. Of course, this profit assumes that the estimate pans out.
On the other hand, if you want to do a bootleg, I’d look at the same expiration (January 2025) but with the $15 strike price. Here, the contract price is only 95 cents or a total premium of $95. And the best part with this trade is that even if time value goes to zero, assuming exercise, you would pay $1,595. However, with your holdings worth $1,781, even with the bootleg tactic, you’d be profitable.
Halliburton (HAL)
If economic trends improve, Halliburton (NYSE:HAL) may benefit from its core business. As the world’s second-largest oil service company, greater resource consumption should lead to increased demand. If you believe in the narrative, you have some intriguing call options to consider.
Based on the unusual activity screener, the HAL Jan 17 ’25 37.00 Call stands out. Here, you could be profitable based on either time value, intrinsic value or a combination of both. By the expiration date, analysts anticipate that HAL stock will hit around $46.33 based on a linear extrapolation.
If so, assuming no time value, the total outlay for exercising 100 shares at the $37 strike comes out to $4,095. By then, your HAL holdings could be worth $4,633.
You also have the ability to target the same-expiry call but with the $42 strike price. The total premium for this contract is noticeably cheaper, $233 instead of $395. And even if you have no time value remaining, exercising your 100 shares will cost you $4,433. That’s still lower than the $4,633 your HAL position may be worth. Thus, it’s one of the call options to consider.
Goodyear Tire (GT)
Confession time: Goodyear Tire (NASDAQ:GT) represents an incredibly boring investment. Then again, I’m not sure if any tire company has been described as a wonderful idea for market participants. At the same time, the leverage of call options can make things interesting.
For those who want to give it a go, I’d look at the GT Jan 17 ’25 15.00 Call. This trade popped up in the unusual options activity screener and it might offer the best-balanced idea. First, the premium is relatively inexpensive, coming in at a total of $125. Also, the bid-ask spread of 8% isn’t bad for such a far-expiry play.
Better yet, if you held onto these call options and “drained” their time value, you may still benefit from intrinsic value. That’s because extrapolated forward, GT stock may hit $17.16 per share. With a complete option cost of $1,625, your holdings post-exercise would be worth $1,716.
In fairness, the same-expiration month $17 call features a cheaper premium of 80 cents or $80 total. However, this contract post-exercise and assuming no time value would cost $1,780.
Pan American Silver (PAAS)
A precious metals mining company, Pan American Silver (NYSE:PAAS) just might benefit from the stubborn inflationary environment. In addition, advanced industries such as electric vehicles require precious resources, including gold and silver. For those who want to try their hands in the derivatives market, you have two very intriguing ideas.
First, let’s talk about our bone-crushing fullback. With an open market price of $13.12, the PAAS Jan 17 ’25 8.00 Call seems risky. The premium comes out to $5.18 or a total of $518. However, when extrapolating Wall Street’s consensus price target, PAAS stock might land at $20.64 near expiration. If so, the total cost of exercising shares at the $8 strike comes out to $1,318. Thus, you could collect a profit of $746.
Second, you could go bootleg with the same-expiration month $17 call. Personally, I like this trade because the total premium comes out to $115. Should I find myself with no time value, assuming the analysts’ consensus view holds, I would still be profitable. That’s because the cost to exercise this option is $1,815, still under the aforementioned $2,064.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
