Options are complicated and not for the faint of heart. While some investors may use them to take on irresponsible leverage levels on their minor positions, others could use them to express their predictions on a particular stock.
For these predictions to be successful, investors must get two things right: choosing the right type of option (call vs. put) and timing the trade correctly before the option expires. Otherwise, the whole investment goes to zero. Understanding these delicate facts can be enlightening, especially when observing which stocks have attracted call option buyers this month.
Call options are a bet that an underlying stock could head higher in a relatively short period. Considering this, shares of Starbucks Co. (NASDAQ: SBUX), Pfizer Inc. (NYSE: PFE), and Hims & Hers Health Inc. (NYSE: HIMS) could make their way to investor watchlists as recent call option trader targets.
Starbucks Co.
After falling by nearly 20 points on its first quarter 2024 earnings results, Starbucks shares are at an appetizing 70% of their 52-week high.
Sticking to price action for just a moment, investors will realize that the rest of the beverage and retail restaurant industry trades at an average of 93.4% of its 52-week high, making Starbucks an undeniable discount. When stocks trade at such low levels relative to their 52-week high, there’s typically a good reason. The coffee giant – known for consistently delighting its shareholders – posted a disappointing set of financials to start the year, as U.S. same-store sales contracted for the first time since 2020 (when Starbucks closed its locations due to COVID-19).
Of course, this has nothing to do with the brand itself; it is a broader economic issue. After financial stocks reported their earnings, banks like Citigroup and Bank of America blamed rising credit card delinquencies and deteriorating FICO scores. An inflation-choked U.S. consumer could also pose temporary headwinds.
However, the market has remained bullish on Starbucks since this recent bump. Despite a bad start to the year, Wall Street analysts still see a price target of $96.4 a share for the stock, calling for up to 26.7% upside from where it has fallen today.
Is this enough upside for traders? It looks like it, as unusual call option activity screeners caught Starbucks' stock, attracting a lot of them. With the Federal Reserve (the Fed) monitoring inflation, markets could be placing a bet on sooner-than-expected rate cuts, which would greatly help consumer discretionary stocks like Starbucks.
Pfizer Inc.
Are healthcare stocks good for portfolios? The short answer is yes, according to the most recent employment situation report. The U.S. economy added only 175,000 jobs in April, well below March’s 315,000. Don’t worry, though, as bad news is good news in today’s market, as a weak labor market could push the Fed into cutting rates sooner.
Healthcare stands out among weak employment reads. The healthcare sector added up to 56,200 jobs in April, representing 32.1% of all the jobs added during the month. With stagflation (low economic growth and high inflation) on their hands, investors should pay attention to where the economy is still showing signs of life.
Knowing that Pfizer stock trades at a dismal 68% of its 52-week high, options traders flooded the stock last week on a bet that the bottom could be in soon. Other traders, known as bears, didn’t even look to beat down this weak stock, as Pfizer’s short interest contracted by 8.2% in the past month alone. Analysts haven’t lost hope either, as they still see a consensus $36 a share price target on Pfizer. To prove these analysts right, the stock must jump by 28.5% from where it trades today.
Hims & Hers Health Inc.
But if investors want technology-like growth in this uncertain economy, they can follow what call option buyers saw in Hims & Hers stock. After posting double to triple-digit growth in the first quarter, Hims & Hers is now a profitable, cash-flowing business, and traders made a bet that it will stay this way.
Now trading at only 72% of its 52-week high, this stock could propose the best growth story on this list. Analysts expect to see earnings per share (EPS) growth of 77.8% this year alone, and price targets of up to $16 by Deutsche Bank analysts suggest the ceiling is 30% higher than today’s price.
