3 Surging Call Options and What They Mean for Investors

Key Points

• Call option traders have been increasing their exposure to three specific stocks lately, and there's one thesis behind the move. 
• Backed by fundamental and financial tailwinds, these companies have attracted increased attention from Wall Street analysts. 
• Price action is beginning to favor momentum in these stocks, helping the timing aspect of these options play out.

Investing in stock options can also bring extended rewards at the expense of higher risks. The main risks come through timing, as investors need to have the direction and timing correct for an underlying stock; otherwise, they would risk their entire position expiring worthless. Knowing that these instruments have higher stakes, investors can benefit from watching an unusual volume of options to spot potential investment trends.

On the call option side, which profits if an underlying stock moves higher, three stocks have recently reported unusual trading volume in these contracts. Connecting the dots from these new moves could deliver a new worldview for investors to take advantage of today. Basic products, small business technology platforms for payments, and even remote work technology are the calls, and the reasons for this will become clear in just a bit.

Making this list of unusual call options trading volume is the SPDR Gold Shares ETF NYSEARCA: GLD as a bullish trend for dollar-quoted commodities like gold, then a rate cut bet for more small business activity taken through PayPal Holdings Inc. NASDAQ: PYPL, and even the remote work meetings and communications platform Zoom Video Inc. NASDAQ: ZM. The reasons behind the pick matter just as much as their potential upside.

Traders Believe Gold's All-Time High Isn't the Final Rally

Most investors don’t understand—or often forget—the relationship between the U.S. dollar and commodity prices. As commodities like gold and oil are quoted in dollars, whatever trend the currency takes, these commodities could potentially move in the opposite direction.

Last week, knowing that the Federal Reserve would be reiterating the interest rate cut path at the Jackson Hole symposium, call option traders started positioning themselves in gold ahead of the announcement. It looks like the bet is being proven right so far since the dollar index sold off by over 0.65% right after the Fed meeting.

This price action increased the gold ETF by 1.1% in a single trading day, amplifying the returns for these call option traders. But the rally in gold is probably still ongoing, as these rate cuts are only the first of over a dozen expected for the following 12 months. This is why these call option trades are probably being made with a multi-quarter time horizon.

Those at Goldman Sachs have forecasted their price targets for gold to be as high as $2,700 an ounce. Nations like China are now stockpiling gold reserves as a vote of no confidence for the future of the U.S. dollar for the coming months. A weaker dollar doesn’t have to mean bad news for all stocks.

New Business Activity Could Send PayPal Stock to New Highs

Historically, PayPal stock has done well when the Fed decided to cut interest rates, and there’s an excellent reason for that. Cheaper financing rates and more available capital make small to medium businesses more likely to expand their operations. Consumers also lean on the new conditions to drive demand higher.

For what it’s worth, PayPal’s platform relies heavily on these trends, taking on momentum since it is the preferred payment processor for these sorts of transactions and financing activities. It also helps that the stock recently rallied on its second-quarter 2024 earnings results, which could have triggered the unusual call option buying.

Now trading within 98% of its 52-week high, PayPal stock still offers investors a few more upside points. Analysts at Mizuho reiterated their “Outperform” rating on PayPal, keeping the price target at $90 a share. They call for as much as 25.2% upside from where it trades today.

However, these analysts weren’t the only ones on Wall Street willing to make their bullish views public. Legal & General Group (PayPal’s largest shareholder) boosted its position by 3.3% as of August 2024, bringing its net investment up to $501.2 million today.

This Trend Positions Zoom Stock for a Promising Double-Digit Upside

Just as PayPal could see some benefits from the rising business activity wave, Zoom is another stock that could rally due to upcoming Fed cuts. As these businesses expand, commercial real estate won’t be too high on the priority list, so remote work becomes the next best thing.

Bringing back one of the main catalysts that made Zoom stock famous, new cases of COVID-19 have been on the rise, not to mention the spreading monkeypox virus. These option traders may have looked to buy insurance on the rest of their portfolios if these breakouts become a national emergency (again).

Knowing this is possible, those at Benchmark placed a price target of up to $83 a share for Zoom stock; this recent valuation would imply a net upside of as much as 18.7% from where the stock trades today. Facing all this potential upside, the stock’s short interest declined by 12.8% in the past month to show bearish capitulation.