Strong Options Interest: A Signal For Investors?

by: Brian Gorban

There are many indicators I use when analyzing a stock. One indicator I look for are relatively cheap dividend stocks. Another strong indicator is insider buying, such as the ones described here. Finally, another indicator is looking at unusual option activity, as I recently brought up here, while some on Oct. 11 caught my eye:

Pharmaceutical Product Development (NASDAQ:PPDI), a contract research organization, provides drug discovery, development, and life-cycle management services. For the second day in a row,there was very strong volume specifically in the Jan $30 and $32.5 calls. This seems to be a vertical call spread arbitrage play as the company has already agreed to be bought out. I'm indifferent toward the stock, as it has already agreed to be acquired by Caryle and Hellman & Friedman.

Accenture (NYSE:ACN) operates as a management consulting, technology services, and outsourcing company. There was very strong volume, specifically with the Oct $49, $50, and $52.5 calls. This looks be a play on its semi-annual dividend, which goes ex-dividend Oct. 12. The stock looks reasonable at 16.8x P/E, 1.1x EV/S, and strong FCF of almost $2.9B. With its secure 2.4% dividend yield, the stock looks to be a quality buy.

Abbott Laboratories (NYSE:ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This had very strong option volume and looks to be an ex-dividend play as well with the Oct $49 and $50 specifically having real strong volume. The stock overall looks attractive at 16x P/E, very strong FCF of over $7.5B, great return on equity in excess of 22%, and secure 3.7% dividend yield. This is a great long-term dividend holding.

Dynegy (NYSE:DYN), through its subsidiaries, engages in the production and sale of electric energy, capacity, and ancillary services in the United States. There was very strong options volume in the Oct and Nov $4 calls along with the Nov $3 put. The stock has been on a roller coaster of late and seems to have some great value at .2x P/B and P/S, and just under $100M FCF positive. They do have a massive $5B debt load which has been weighing on shares as the company has negative returns on assets and equity. With the company near its low and showing some good value, I think this would be appropriate for a speculative buy.

99¢ Only Stores (NYSE:NDN) engages in the retail sale of consumable general merchandise, with a focus on name-brand products. The company agreed Tuesday to be bought out, and options volume exploded, specifically with the Mar $21 and $22.50 calls. This has become an arbitrage play, so I refrain from giving any recommendation.

Warner Chilcott plc (NASDAQ:WCRX), a specialty pharmaceutical company, focuses on the development, manufacture, and promotion of branded pharmaceutical products in women’s healthcare, gastroenterology, dermatology, and urology segments in North America and western Europe markets. Options volume surged specifically on the Jan $15 and $18 calls along with the Jan $14 puts. The company has a trailing 34x P/E, but a very attractive forward 4x P/E, and shows some value at a relatively cheap 1.4x P/S and almost 23% return on equity.

However, the company has its risks, with just over $4B in debt and just over $260M in cash. I think with the company showing a strong $850M in FCF this past year and earnings widely expected to pick up throughout the year, this is a great speculative buy, and it can look to pay down the debt rather quickly.

Harmony Gold Mining Company Limited (NYSE:HMY) engages in underground and surface gold mining operations in South Africa and Papua New Guinea. Option volume increased specifically in the Nov $11 and $13 puts. The company is strongly correlated with the price of gold, and I've already admitted that precious metals are out of my circle of competence. Best of luck with whichever way you choose to play this position.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABT over the next 72 hours.

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