3 Stocks to Watch as Call Option Activity Heats Up

Key Points

• As options traders seek to gain leveraged exposure to these three stocks, investors should consider the reasoning behind these bets. 
• Backed by Wall Street analyst sentiment and projections, these stocks may see further upside in the coming months. 
• Institutional buying comes as a reminder that these traders aren't alone in their bullish views on these names.

Whenever investors think of how to get exposure to a stock’s direction, they typically only think of buying or selling a stock. However, professionals tend to delve a bit deeper into their views through the use of stock options. These options give traders the advantage of leverage to bet on a stock’s move. However, this benefit does come at a cost.

Options have an expiration date, which means if the trader gets either the timing or the direction of the stock wrong, then he stands to lose most—if not all—of what was paid to buy the options contract. For this reason, retail traders can closely watch stock options activity in certain stocks once it becomes unusually high. Focusing on call options (a bullish bet on a stock), these names experienced an unusual volume of call options buying.

Basic materials, steel in particular, manufacturer Cleveland-Cliffs Inc. NYSE: CLF has made it on the list, followed by mortgage lender Rocket Companies Inc. NYSE: RKT as a bottoming play in the real estate sector, paired with the risk-on attitude that could come to the cryptocurrency market, a view that showed up in call options for MicroStrategy Inc. NASDAQ: MSTR.

New Commodity Cycle Could Propel Cleveland-Cliffs Stock Toward Double-Digit Gains

Investors may have missed the massive dip that United States Steel Co. NYSE: X experienced recently due to a blocked takeover bid. After this event affected the steel sector, Cleveland-Cliffs sold off to only 47% of its 52-week high price due to completely unrelated sentiment.

This lays the foundation for a potentially swift recovery, as investors realize that one competitor’s bad day doesn’t have to mean it’s a bear market for the entire industry. Now that the Federal Reserve is set to cut interest rates, the U.S. manufacturing sector might see a new spark in demand, and that includes steel.

Wall Street analysts now forecast up to 3,025% earnings per share (EPS) growth in this stock for the next 12 months, helping those at Bank of America land on a price target of up to $18 a share. To prove these valuations right, the stock would need to rally by 66.8% from where it trades today.

Some on Wall Street have already started to take advantage of this opportunity. Dimensional Fund Advisors boosted its position in Cleveland-Cliffs stock by as much as 54.7% as of August 2024, bringing its net investment to $244.8 million.

All of these trends could explain why up to 48,243 call options were bought at the end of August, right as institutional investors started to invest in the company, expecting a new upcycle.

Bottoming Mortgage Market Could Boost Rocket Companies' Stock Higher

The United States mortgage market index is now at 1996 lows, and would-be homebuyers who had previously been sitting on the sidelines might finally get the chance to finance a new home at better and more flexible rates.

When yields and rates come down, the price of fixed-income products (like bonds and mortgages) goes up, as their relationship is inverse. Looking into Rocket Companies' financials, investors will notice up to $9.5 billion worth of mortgages held for sale in the balance sheet.

As mortgage rates have come down for the past quarter and are set to lower once the Fed announces rate cuts, this could send the stock's book value higher. Knowing this, Wall Street analysts have forecast up to 127.3% EPS growth for the company's next 12 months.

Facing these inevitable tailwinds, traders decided to buy up to 14,538 call options on the stock so that they could profit from the seemingly predictable timeline before a potential rally. Even bears withdrew from this company, as Rocket stock's short interest declined by 6.9% over the past month alone, showing bearish capitulation.

Bitcoin Surge Sparks Excitement Among Traders for MicroStrategy Stock

As interest rates come down, not only are mortgages set to benefit, but asset classes on the riskier side of the spectrum, such as Bitcoin. While some may buy Bitcoin directly, there’s a better way to play the potential rally in cryptocurrency.

Just like oil companies in the energy sector benefit from higher oil prices, Bitcoin miners like MicroStrategy do just as well when the currency price goes up. Knowing that according to the company’s financials, up to 226,500 Bitcoins were held on the balance sheet.

At today’s price, the company holds $12.9 billion worth of the currency, a holding that could significantly boost the stock’s book value once the market takes a risk-on approach to the lower interest rate environment. Knowing this, over 15,000 call options were bought in this stock as a directional bet.

Wall Street analysts landed on a $198.5 a share price target for this stock, calling for up to 60% upside from where it trades today. More than that, MicroStrategy stock’s short interest has been declining since the first quarter of 2024; it looks like the Bitcoin rally might be imminent now.