Top 3 Stocks Seeing a Surge in Call Option Activity

Key Points

• Three stocks have attracted call option buyers into the turf, betting they can rally relatively quickly.
• These traders could be right, backed by fundamental trends and a promise of interest rate cuts by September 2024.
• Wall Street analysts agree there's a double-digit upside in their price targets; institutions also bought these stocks.

There are typically only two ways for investors to expose their capital to a stock’s path, whether higher or lower.  The first way everyone should know of is to buy stock shares in a company of an investor’s choice. On the other hand, there are stock options where investors can use leverage to increase their exposure to a stock without laying up as much capital.

However, stock options have two caveats to them. When buying a call option (betting the stock will rise) or put option (betting on a fall), investors need to get two things right or risk losing 100% of what they paid to buy the options contract. The first factor is the direction, of course, but the second is a bit trickier, which is the timing of the move. Since options have an expiration date, the stock needs to reach a specific price by a certain date for investors to make a profit.

Retail investors should pay attention when stocks report unusually high call options volume since it could signal that a lot of big traders in the market feel confident that these stocks will see a rally in a relatively short period. Included in this list are stocks like Nike Inc. NYSE: NKE, Capital One Financial Co. NYSE: COF, and even Bath & Body Works Inc. NYSE: BBWI. Here’s why they might be worth taking a look at today.

Why Investors Believe Nike Stock’s Dip Won’t Last

Recently, shares of Nike stock took a dive of over 20% after the company reported its latest quarterly earnings results, which weren’t that bad. The reaction came from perceived weakness in the Chinese market and lower-than-expected guidance for the rest of the year.

Because the stock now trades at only 60% of its 52-week high, it might look like a potential watchlist addition today. Analysts at Guggenheim feel this stock could be worth up to $115 a share, daring it to rally 52.5% from its current low.

Now, these upside targets have everything to do with the timing of the consumer discretionary sector, which is facing a pending rally now that the Federal Reserve (the Fed) is looking to cut interest rates as soon as September 2024, according to the CME’s FedWatch tool and providing the catalyst for options activity to spur higher.

Lower interest rates tend to spark consumer activity, and stocks like Nike—with deep market penetration—are at the forefront of the line to sweep up more profits. Knowing this, short sellers decided to step away from Nike stock, as its short interest declined by 7.7% in the past month alone.

New Consumer Cycle Drives Short Sellers Away from Capital One Financial

The same promise of interest rate cuts hanging over Nike stock’s head is also hanging over Capital One Financial. Credit card delinquency rates have been a pain point for those analyzing the economy today, so a lower rate and sparked consumer confidence can also be a welcoming shift in the financial sector.

Knowing that Capital One is one of the main options for young consumers, short sellers have started reducing their risk of facing a rally in this stock. Capital One Financial stock’s short interest fell by 7.1% in the past month, showing this sentiment change in the bullish direction.

Analysts at Jefferies Financial Group felt comfortable enough to slap a valuation of up to $165 a share for Capital One Financial stock today, implying the stock should rally by up to 21.3% from today’s price. However, analysts weren’t the only ones on Wall Street who saw potential in the stock.

These trends not only helped analysts and option buyers decide on a continued rally for this stock, but the Vanguard Group (Capital One’s largest shareholder) boosted its stake in the company by 0.7%, bringing the asset manager’s net investment up to $4.6 billion today.

Bath & Body Works: Credit the New Rally to Its Own Market Cycle

Lower interest rates could spark consumer product demand, and investors can add real estate to the mix. If rate cuts happen, the interest rate attached to mortgages will also come down, helping would-be homebuyers finally pull the trigger on a purchase.

Because building permits are now down by 7% on the year and roughly down 3.5% on the month, some could argue that the real estate cycle is now beginning to bottom. Still, the spark that will turn it around is the potential rate cuts in September 2024.

Bath & Body Works call option buyers swept in, knowing that a new home often means furnishing its bathroom with the right ingredients, and this brand is typically a first choice for many households. Due to this trend, analysts at Deutsche Bank see a valuation of up to $57 a share for Bath & Body Works.

The stock must rally 54.5% from where it trades today to prove these targets right. More than that, the Vanguard Group saw fit to boost its position in the stock by 4.2% as of May 2024, bringing its net investment to $1.4 billion today as a vote of confidence in the new real estate cycle.