3 Stocks About to Boom on Unusual Call Option Volume

Key Points

• It looks like options traders are back on the block, and they picked three stocks with a thesis that goes around higher oil prices.
• With a different narrative for your portfolio, you can strike a balance from speculation all the way to a near sure bet. 
• Wall Street analysts and institutional buyers confirm the writing on the wall.

Most investors focus on the volume profile of the stocks they analyze, forgetting that there is another primary market that can act as a leading indicator. Options often give you a glimpse of the direction the market expects a stock to take. You are best served by watching the activity in those markets.

By watching out for unusual options activity in certain stocks, you can spot these opportunities before the bulk of the market even realizes what’s happening. This is why a highly cyclical play like Transocean Ltd. NYSE: RIG, a longer-term macro play like Daqo New Energy Corp. NYSE: DQ, and the most stable of them all, The Coca-Cola Company NYSE: KO should be on your watchlist today.

There are more than a few reasons why these stocks have attracted the attention of these traders today, reasons that you too can follow along to squeeze out a decent return.

Final Bets on China’s Comeback

Daqo New Energy rose by 76% after its quarterly earnings announcement. Traders see the initial price action as maybe the start of an even more significant trend. Still unsure of the timing, they chose to go for call options instead of buying the stock outright.

China is an exciting story today, with mega investors like Michael Burry (yes, the guy who called the 2008 financial crisis) and even Ray Dalio buying into the region. While these whales can’t take risks on smaller companies like Daqo, you don’t have that limitation.

Oil prices broke above their hard ceiling of $80 a barrel, analysts at The Goldman Sachs Group Inc. NYSE: GS think it could go as high as $100 a barrel this year. This would make alternative energy more attractive, which is where Daqo comes into play.

Because it makes polysilicon, the main ingredient in the chips and instruments that make solar panels work, it would be the first stock in line to get paid. Riding on the China story and an energy preference shift on expensive oil, traders think this one could pop soon.

In fact, Wall Street analysts think Daqo stock could rally by 45% in their $38.6 a share price target. Now you know one of the reasons behind this view and why options traders are stampeding into the stock.

Transocean is First in Line

Speaking of oil going higher, Transocean is critical in supporting energy giants like Exxon Mobil Co. NYSE: XOM to start producing and marketing more expensive oil. Because it sells and leases rig equipment, among other things, Transocean is first in line to get paid on this oil pop.

Figure that the oil price rose in the quarter after Transocean's last earnings announcement, making it highly likely to produce an earnings beat in the company's following quarterly results. That's a reasonable thesis to support, so options traders felt confident pouring into the name ahead of the announcement.

After rallying by as much as 28% in the past month, this stock still has a long way to go. Wall Street analysts think that earnings per share (EPS) can grow by as much as 370% in the next 12 months, a projection that drove price targets higher to $7.9 a share, calling for a rally of 37% from today’s prices.

Two major players have been buying the stock lately, both the Vanguard Group and Fisher Asset Management and their stake in the stock has increased this month. Vanguard’s 6.4% increase represented a transaction to the tune of $27.8 million, while Fisher’s 11% shows a $180,000 bet to go along.

Coca-Cola Ties it All With a Bow

Keeping up with the oil story, higher prices can’t possibly be reasonable for the U.S. dollar. A declining dollar against other currencies can make big international firms like Coca-Cola more attractive.

Not only that but being a $260 billion behemoth allows Coca-Cola to hedge away any increased shipping and production costs that may result from more expensive oil prices. All this sounds like the perfect, less speculative opportunity to make up for what’s happening.

Double-digit upside is hard to find in these big companies, but now that the writing is on the wall (or so do options traders think), analysts at Citigroup Inc. NYSE: C see a price target of up to $68 a share, which is roughly 15% higher from where the stock trades today.

Being the low-beta name in this group, Coca-Cola makes for the cheaper and less risky alternative to play today’s market interest in the options market.