Cheap Call Option Strategy

Cheap call option play on a business transformation

I don’t frequently buy actual call options/spreads on stocks I own or follow but I found this bet to be a great setup in lieu of owning the underlying common stock. (Side note: I should do a post on when to buy a call spread vs. owning the underlying stock…)

Here’s the setup…

I think shares of this stock can double over the next 12-18 months which would be an excellent return. Options expiring in January 2024 are so cheap that I can make that same bet with 15x upside instead of the 2x owning the stock (I do own some of the common as well though). The main crux of the thesis on this company:

• Repaying massive amount of debt through major divestitures at good prices

• Market not giving credit to stable cash flows

• First round of capital returns in several years (moving to 50% of free cash flow)

Of course the options could expire worthless if the bet doesn’t play out. But I like this strategy in that the company is in the midst of a dramatic portfolio shakeup selling assets at good prices and acquiring a few attractive assets to jumpstart growth. All of which should wrap up by yearend 2023 and thus fitting perfectly into this option timeframe.

In a 40 stock portfolio (i.e everything weighted 2.5%), I’d have to buy $2.5 in a $100 portfolio to get $2.5 upside. Instead, I can invest $0.17 for the same $2.5 upside with these call spreads.

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