Why Put Option Volume Means a Bullish Future for Marriott Stock

Key Points

• Despite a market rotation out of some consumer discretionary names, Marriott stock still proposes a double-digit upside.
• Wall Street analysts agree that fundamental and technical factors align for the stock to fulfill this bullish expectation. 
• Short sellers are bailing on the stock, and put option buyers are coming in to hedge their longs rather than bet against Marriott. 

Investors typically have two ways to express their bearish views of a stock: sell out of a stock expected to fall shortly or outright short the stock. Shorting is a bit more complex since the downside is theoretically infinite while the upside is fixed, and borrowing shares creates an interest expense for most.

Another—less common—way to bet against a stock is to buy put options, which also have a caveat. Namely, investors need to get not only the stock’s direction (downward in this case) right but also the timing of the trade, as option contracts come with an expiration date. One of the intricacies of watching the stock options market is that there is always a hidden message.

This is why rising option volume for Marriott International Inc. NASDAQ: MAR might not be a bearish sign. Now that the market is accelerating its rotation out of the technology sector and running away from some consumer discretionary names, investors can assume that the only way to go from here is up. Acting as a catalyst for this change, the Federal Reserve (the Fed) is looking to cut interest rates in the coming months to help the turnaround.

Marriott Stock Poised for Strength in the Next Market Cycle

Stocks in the financial sector, namely banking names like Bank of America Co. NYSE: BAC and Citigroup Inc. NYSE: C, reported a deteriorating state in consumer credit trends, particularly rising credit card delinquencies and net charge-offs.

Inflation is to blame for this trend, as consumers can barely keep up with living expenses today. So why would there be an expectation that less necessary expenses like leisure and travel will expand in the coming quarters? The answer lies in the most recent jobs data.

This could be better, as the United States economy has added only 114,000 jobs in the past month. What's interesting for investors is how many went into the leisure and hospitality industry, about 23,000. Taking up to 20.2% of the total jobs for the month is not insignificant, and that's where Marriott stock comes into play.

If management teams are hiring for the industry, it means that there is a higher demand cycle coming to it. However, this thesis is highly dependent on the Fed following through with its interest rate cut policy, which, according to the CME's FedWatch tool, is over 90% likely to happen by September 2024.

Wall Street's Take on Marriott Stock: Insurance Hedging in Focus

Wall Street analysts are now forecasting up to 16.3% earnings per share (EPS) growth for Marriott stock in the next 12 months, which is enough to send the stock into bullish territory.

Despite a selloff of roughly 6.2% in the past month for the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY, Marriott stock now trades at 84% of its 52-week high price.

Adding to the optimism, J.P. Morgan Chase & Co. set a price target of $255 a share for Marriott stock. To prove these targets right, the stock must rally 19.3% from where it trades today.

These targets would not only mean a double-digit upside but also call for Marriott stock to come close to a near-all-time high price. Given the bullish sentiment surrounding Marriott stock, investors currently holding long positions might consider hedging to mitigate potential risks.

One of these risks is that the Fed ends up postponing its rate cuts, causing Marriott's stock to come down significantly. By buying put options, investors who own the stock can offset any potential losses in the stock's decline by making an equivalent gain on their put option contracts (which go up in value when a stock goes down).

Investors can assume this by looking at recent buy (or sell) activity within Marriott stock. As of August 2024, First Pacific Advisors LP had increased its stakes in the company by as much as 2.1%.

While this may not seem much in percentage terms, it brought the asset manager's net investment up to $148.3 million, making it the second-largest stockholder in Marriott.

As a final check for investors to determine whether the rise in put option volume is bearish or bullish, the 11.3% decline in Marriott stock's short interest over the past month proves that bearish capitulation is occurring at the moment.