Investors have several ways to gain exposure to a stock’s price movement, with the most popular being to simply buy shares. However, there's also a method that can limit downside risk and significantly boost profit potential—if a few key conditions are met. Specifically, getting both the direction and timing right. Stock options can increase upside and limit downside, but their value depends on choosing the correct direction and acting within the option’s expiration date.
Knowing this, you can see how unusual options trading activity can signal a sort of aggressive conviction toward a stock and its perceived move, as well as the timing of such a move. Recently, three technology stocks showed such unusual trading activity: Alphabet Inc. (NASDAQ: GOOG), Robinhood Markets Inc. (NASDAQ: HOOD), and PayPal Holdings Inc. (NASDAQ: PYPL).
1. Alphabet's Upside: Wall Street and Options Traders Are Aligned
Recently, Google-parent company Alphabet shares rose by over 10% after the company reported its quarterly earnings results, giving markets another reason to stick by this household technology name. However, as the market encountered volatility in the following days, GOOG gave back most of its quick gains.
However, this recent bearish momentum failed to drive away investors or deter Wall Street analyst sentiment. More importantly, it failed to attract new short sellers to carry the stock lower. Over the past month, Alphabet stock’s short interest declined by as much as 3.6%, showing signs of capitulation from the short sellers.
Perhaps leaning on these bullish factors, Wall Street analysts recently reiterated their views on Alphabet stock, particularly those at Pivotal Research, who kept a Buy rating on the stock alongside a price target boost to a high of $225 a share. To prove these new targets right, Alphabet stock would need to rally by as much as 31.5% from where it trades today.
That’s only half the equation, though, as if no new buyers come in, then there’s nothing to celebrate just yet. Last week, 279,082 call options contracts were bought in a multi-million dollar transaction betting on Alphabet stock, reclaiming all the post-earnings rallies and then some in the not-so-distant future.
2. Robinhood: Analysts Forecast Double-Digit Gains; Options Buyers Show Renewed Interest
As inflation pressures rise, traditionally managed funds may struggle to outperform inflation. This could drive more retail investors to manage their own capital and invest on a discretionary basis. This is where Robinhood’s mission to democratize the financial markets comes into play, and now more than ever.
The results of this trend can be seen in the company’s financials, where revenue and cash flow growth are pushing double-digits each quarter as more and more people sign up for the platform and fund their accounts.
Knowing that the platform is highly likely to deliver another hot quarter in the coming months, call options traders went in to buy ahead of the release, this time by taking up to 174,025 contracts off the market in a sizeable bet that will pay off in the near future, as long as their thesis is right and Robinhood stock can deliver a significant rally.
Wall Street analysts think the stock can get it done, especially those at JMP Securities, who recently reiterated their Market Outperform rating for Robinhood, this time with a $33 a share price target—suggesting up to 38% upside from its current price and a potential new high for the year.
3. PayPal: Call Option Traders Are Buying the Dip
After shares of PayPal sold down by as much as 7% from their recent highs, some in the stock market think that there aren’t too many reasons to stay bearish on PayPal stock today. Options traders and Wall Street analysts don’t see the recent drawdown from highs as a reason to change their minds.
After the dip, up to 107,187 call options were bought last week as a bet that PayPal stock will swiftly make its way back up to its recent highs and erase some of the selloff effects. Then, there are the implications from Wall Street analysts, especially from those at Macquarie, who recently boosted their valuations on PayPal to $95.
To achieve these new price targets, PayPal stock would need to deliver investors a run of as much as 23% from today’s price. Even so, PayPal would still be a fraction of what it was only a couple of years ago when the stock reached its high of just over $300 a share.
