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Bullish Options Activity In The Utility Sector

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On Wednesday, June 18, there was large call buying in the Consolidated Edison (ED) Aug $60 calls and the Southern Company (SO) Aug $46 calls around 12:30 P.M. EST. Con Edison call activity was 22 times the average daily average (over 10 times for Southern). Given all of the M&A activity this year the utility sector could be the next place for deals to emerge. Regardless, this trader(s) is buying out-of-the-money calls in the August options expiration in these U.S. based utility companies. Both will report Q2 earnings in late July/early August.

Fundamentals

Southern trades at a P/E ratio of 15.57x (2015 estimates), 2.6% revenue growth, 4.72% dividend yield, and has an average analyst price target of $43. This compares to Con Edison’s P/E ratio of 14.59x (2015 estimates), 2.2% revenue growth, 4.46% dividend yield, and has an average analyst price target of $57.50. Both have similar fundamentals, but Southern is the much larger of the two with a market cap of $39.7B vs. Con Edison’s $16.5B market cap.

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Southern Company Options Trade Idea

Buy the Aug $45 call for $0.65 or better
Stop loss- None
First upside target- $1.30
Second upside target- $2.00

Disclosure: I’m long the Aug $46 calls for $0.23 each.

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9 Comments

Join In on this conversation, post a comment below.
Visitor - Pat: Mitchell, Could these be a hedge against open short position in utilities? Also, what do you make of around 41,000 July 47 calls purchased for 0.15 in SO on 06/20. I think it was stock replacement but does not seem that it could work with just 1 week remaining.
Reply
MitchellWarren: Hi Pat. I agree with the July $47 call analysis. Those is a very slim chance of them getting there money back (I actually sold 1/2 of my Aug calls soon after those were bought). Short interest- There is always a possibility that call buying could be a hedge against a short position, but SO short interest is only 4.51%. Given that it has a 4.72% yield I doubt shorts stay in there positions for very long.
Visitor - Pat: Thanks Mitchell. What do you see for utilities in general and SO in particular for the short term? It keeps getting slammed and the initial buying early part of the day keeps getting sold these days.
Reply
Visitor - Bhavesh: Hi Mitchell, Do you still see the trade working out. Really bad couple of days for utilities. How do you see it affected by Yellen's speech yesterday?

Thanks.
Reply
MitchellWarren: Hi Bhavesh. I sold 1/2 of my Aug. $46 calls for $0.56 (paid $0.23) and plan on holding the rest of the position in expiration. I think in the near-term there is support at the 100-day SMA for SO. Open interest is still large in the Aug. $45 and $46 calls so there is hope. M&A is still a possibility in the utility sector too, which could get them going in the right direction.
Visitor - Bhavesh: Thanks Mitchell. I have the Aug 45 and Nov 45 calls and added on this dip mainly due to large open OI from June which has not been closed yet.
Visitor - Bhavesh: Do you see any particular reason for it to be down past 3 days? Any affect of the Yellen speech?
Reply
Visitor - Kim: Utilities are a defensive play, does this show the market is in a retrenchment mode?
Reply
MitchellWarren: Hi Kim. I think it is a sign of the continued 0-0.25% Fed Funds rate and the rally in the TLT despite everyone expecting high 10-year note yields. These utilities offer some better dividends compared that of the TLT's 3.02% yield.
Reply

About the Author

MitchellWarren

Mitchell Warren is the Founder and CEO of Options Risk Management.  ORM helps traders and investors navigate the stock market using a combination of technical analysis, fundamental analysis, and option based strategies to minimize risk and maximize profits.

He also offers 1 on 1 mentoring courses for basis to advanced options strategies, fundamental and technical analysis, implied/historical volatiility (including VIX trading), risk management, and his exact approach to trading and investing.


He has traded stocks, options, and futures for seven years, with a primary focus on intermediate term strategies. In addition to his experience in the public markets, he is a venture capitalist involved in companies such as Collectoons. @MitchellKWarren is his handle on Twitter and StockTwits.

 

 

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