In this edition of the Alpha Letter, we cover:
Stocks & Options: Midcap stocks with bullish option sentiment
Dividend Growth: Upcoming dividend increases
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Stocks & Options
Let’s start off by looking at the options market as of close Thursday. Here’s a summary from the Options Matrix:
The bubble size corresponds to the amount of total premium trades, while the color of each bubble represents the sentiment of options traded for each name. Green is bullish, red is bearish, and yellow is neutral.
While you probably can’t read the smallest bubbles on here, I wanted to point out the biggest players in the options market on Thursday. The most noteworthy is Tesla, which is returning to its position atop the options market that it held for much of 2020.
Tesla traded more in options than any other name, including indices like SPX. The scale of the Tesla options market is pretty amazing to see. Because of the increased interest in Tesla options, implied volatility is fairly high, but still much lower than it was for much of 2020.
Right now, the at-the-money calls expiring today have a 34% IV, which is actually fairly reasonable. The calls with strikes near $800 are in the 80% range.
Usually, it would be a bad idea to buy and hold calls on Tesla because of the IV. Even if you were correct in direction, you could lose because of high theta decay. However, I wouldn’t give this warning right now (theta decay is always a risk, but Tesla’s moderate IV levels don’t make me think that holding calls is definitely a bad idea).
Now let’s look at some under-the-radar companies with high option volume.
We know that Tesla, AMC, and GameStop have robust options markets, but are there any surprising small or midcap stocks with unusual option activity?
Within IWM (Russell 2000 small and midcap ETF), there are several names with high option volume.
GameStop and AMC dominate this list, but PLUG is a lesser known name that I’ve seen on this list a lot over the last few weeks.
Plug Power is up 18% over the last month but stumbled on Thursday. The bullish option activity, including high call premium and low put/call ratio, could indicate that there is still more upside.
MicroStrategy (MSTR) is another stock with high option activity. The company owns over 100,000 Bitcoin and effectively trades as a proxy for the cryptocurrency. Trading MSTR’s options could be a good way to bet on the price of Bitcoin if you don’t have a crypto brokerage account.
A stock on this list you might recognize is Bed Bath & Beyond (BBBY), which has shown high option volume and a recent spike in price as it tends to move with AMC, GameStop, and other short squeeze stocks. Its put/call ratio of 0.25 is very low.
For more option flow data, be sure to check out the Options Matrix.
Looking to build up your dividend portfolio?
This article by Dividend Derek caught my eye. It’s a list of 13 stocks that will increase their dividend next week, including two “dividend kings”.
While you’ll have to read the article for the full list, one that caught my eye is Lennox International (LII). Its a $12.5 billion supplier of heating and air conditioning components based in the Dallas suburb of Richardson, Texas.
Lennox is up 46% over the last year and is boosting its dividend by 19.48% next week. The dividend bump will make the forward yield 1.13%.
Another one that interests me is Alexandria Real Estate Equities (ARE). ARE is a real estate investment trust that owns office buildings and laboratories and focuses on offering real estate to companies in the life science and tech industries.
ARE’s dividend will increase 2.75% to give it a forward yield of 2.37%.