3 Stocks with Surging Call Option Volume in the Recovery Rally

Key Points

• Three stocks caught option traders' attention during the recent S&P 500 selloff and recovery rally, and these views make sense.
• Backed by fundamental reasons, Wall Street analysts reiterate that each of these picks offers double-digit upside. 
• Low volatility and predictable cash flow businesses are the first to recover, which is why these three made the list.

When investors seek exposure to the stocks of their choice, they typically take a one-dimensional approach to taking on risk to enjoy the potential upside in their views. Participants will buy shares in a company and either profit when the stock rises or otherwise take a loss on a price decline. Still, there is another way to gain leverage and amplify returns when the underlying view is right.

This is done through options contracts, and when traders go big on an options trade, investors should pay attention. Options have one big caveat, where these trends' importance is amplified. Traders need to get the direction of the stock right, and the timing, since options contracts expire worthless by a certain date. Knowing that time is working against these traders, investors have a reasonable timeline in mind when they spot unusual options activity.

Three stocks saw unusually high call options trading volume (call options appreciate when the stock price moves higher), so these are the trends that investors could get behind in the coming months before the underlying stocks rally. Topping this list is consumer discretionary giant Nike Inc. NYSE: NKE, cleaning and home supplies behemoth Clorox Co. NYSE: CLX, and even this technology stock that holds a ton of Bitcoin ready for the risk-on cycle MicroStrategy Inc. NASDAQ: MSTR.

Value Investors Eye Nike Stock for a Second Chance

After Nike reported its second quarter 2024 earnings results, most of the market thought that bad news was brewing for the company. The worries came mostly from the slowing business in the brand’s China exposure. Still, even that couldn’t justify keeping the stock down.

Nike stock crashed by roughly 21% after the announcement, but one value investor saw the writing on the wall and decided to buy the dip. This mystery player was revealed to be Bill Ackman, best known for his value-investing approach to the market.

As it turns out, China’s inflation rate has been positive and expanding every month of 2024, disqualifying the main worries surrounding Nike’s earning and revenue potential inside Asia’s powerhouse. Facing these facts made Ackman bullish on the stock, while others on Wall Street shared their bullish views for the company.

Wall Street analysts now forecast 13.1% earnings per share (EPS) growth for Nike's next 12 months, helping Citigroup land on a $102 price target on Nike stock. They dare it to rally by as much as 22.1% from its recent low.

Traders Snap Up Clorox Stock for Its Stability Premium

There's always a good reason for markets to pay a premium valuation for certain stocks. In the case of Clorox, investors could probably guess that this reason is tied to the company's stability despite market volatility cycles. A low beta of 0.38 offers investors a smoother ride compared to other names, which sets it up for a quicker recovery.

Clorox stock trades at a price-to-earnings ratio (P/E) of 75.3x today, which is significantly above the consumer staples sector's average valuation of 20.6x, and that is the stability that markets are willing to place on a stock like this one. More than that, the company offers shareholders a $4.88 payout, translating into an annual dividend of 3.3%.

With this stable yield, low volatility, and predictable cash flows rooted in the company's product line, traders found enough reasons to jump in call options during the S&P 500 drawdown caused by the so-called "carry trade" between the Japanese yen and the U.S. dollar.

Those at DA Davidson see a valuation of $153 a share for Clorox stock, which won't be as much upside as Nike's but still calls for up to 4% from today's stock price. This leads to a double-digit upside when accounting for Clorox's dividend yield.

Risk-On Cycle Poised to Boost MicroStrategy’s Bitcoin Holdings

When participants start taking a risk-on attitude to financial markets, certain asset classes tend to outperform the most and also see the first signs of bullish price action. A new promise of interest rate cuts from the Federal Reserve (the Fed) might trigger the latest wave of risk-on investments.

The last time this happened, Bitcoin came out on top. While history might not repeat precisely like 2020 through 2022, it could rhyme enough to send cryptocurrency holders like MicroStrategy to higher prices. According to the company’s investor relations website, it now holds up to 226,500 bitcoins on its balance sheet.

This number is likely to increase for the next quarter and represents a value of $13.6 million for MicroStrategy’s balance sheet. Considering that the price of bitcoin could rise on these risk-on trends, analysts at Benchmark raised their price targets for MicroStrategy stock to up to $215 a share, or 61.8% from where it trades today.