Call Option Interest Soars in These 3 Stocks

Key Points

• When call option volumes rise for stocks, investors need to understand that the direction and timing of a stock move have already been decided.
• Three stocks show unusual call option activity, as bullish fundamental and financial trends back bets.
• Wall Street analysts and institutions agree, as their predictions and valuations also show double-digit upside. 

Buying a stock is one way to expose capital to a potential upside in a company’s trajectory. Owning a stock opens the way for a one-for-one plan, as the investment will only move up or down in lockstep with each point the stock moves up or down. There is another way to be exposed to a stock’s upside: to tip the scale in favor of those who know what is about to happen.

Through call options, investors can tap into asymmetrical return scales, where risk diminishes while potential gains are amplified through leverage. The caveat to this strategy is that traders need to get both the direction and timing of a stock right to make a profit; otherwise, it is likely that 100% of the investment can be lost.

Knowing this, investors can attempt to reverse engineer decisions made by those who justified buying heavy into call options for certain stocks rather than just buying the stock outright. Three names that lured call option buyers on masse recently are Chewy Inc. NYSE: CHWY, Salesforce Inc. NYSE: CRM, and ChargePoint Holdings Inc. NYSE: CHPT, with each having fundamental reasons to justify these positions.

Investors Turn to Chewy During Stagflation for Growth Opportunities

Unfortunately, the United States economy is waking up to one of the most dreaded conditions in history. Defined as low economic growth and high inflation, stagflation fills the empty cells in every analyst’s financial model when accounting for future earnings growth.

Luckily for Chewy, it is more of a part of the consumer staples sector than the consumer discretionary sector, meaning that its earnings are relatively predictable since people will always find room in their budgets to ensure the family's furry members are cared for.

Because of this, analysts on Wall Street now expect to see earnings per share (EPS) growth of up to 70% for the next 12 months. Riding on these expectations, those at J.P. Morgan Chase & Co. saw it fit to boost Chewy’s stock valuation up to $28 a share, daring it to rally by as much as 10% from where it sits today.

Because the stock has now traded down to only 63% of its 52-week high, analysts may be careful not to sound too bullish on a beaten-down stock in case momentum takes longer to turn. However, investors can lean on the fact that unusual call option activity swept into Chewy stock, moving the goalpost forward regarding timing the next rally.

Another technical factor that helps investors understand timing and upside comes from the bearish side. Chewy stock’s short interest plummeted by 18.7% in the past month, showing that even bears realize this isn’t a stock to bet against today.

Salesforce Stock Discount Attracts Institutional Interest

After shares of Salesforce fell to a tragic 77% of their 52-week high price, it wasn’t only option traders who became optimistic about a swift recovery in this company.

Those at Janus Henderson saw fit to boost their stake in Salesforce stock by up to 3.4% in the past quarter, bringing their net investment to $195 million today. But that’s a blip in the radar, as over the past year, up to $74.6 billion of institutional money found its way into Salesforce stock, roughly 31.4% of the company’s market capitalization.

Why the bullish trend? Salesforce stock trades at a P/E ratio of 44.0x today, which falls significantly below the computer sector’s average 200.6x P/E valuation. This valuation is likely driven higher by stratospheric rallies in technology stocks like NVIDIA Co. NASDAQ: NVDA.

Following these trends, analysts at Jefferies Financial Group saw fit to boost Salesforce stock’s price target to $350 a share, daring it to rally by as much as 42.8% from its current level.

Buffett's Influence on ChargePoint Stock's Meteoric Rise

After a nine-day buying streak into shares of Occidental Petroleum Co. NYSE: OXY, Warren Buffett has publicly announced that he is now bullish in the energy sector, likely backed by a potential pending rally in oil prices.

Because ChargePoint stock deals in providing electric vehicles (EV) with a necessary network of charging stations, the stock is prime to call for immediate call option surges, and it did.

As oil prices rise, proving Buffett right once again, gasoline prices will inevitably rise, making EVs a more attractive proposition for consumers. While most in the market may jump directly to stocks like Tesla Inc. NASDAQ: TSLA to exploit this trend, the stock market is a game of dominoes.

What comes next after Tesla’s sales are made is the need to fuel these vehicles, and that’s where ChargePoint’s services come into play. Knowing this, Wall Street analysts landed on a consensus price target of $4.96 a share for ChargePoint, daring it to rally by as much as 250% from where it sits today.

The Vanguard Group, ChargePoint stock’s largest shareholder, agrees with this forecast. As of the end of 2023’s fiscal year, the asset manager had boosted its stake in ChargePoint stock by 12.9%, bringing its net investment to $145 million today.