Wednesday’s Unusual Options Activity Highlighted Canadian Call vs. Luxury Put. Which to Bet On? I Like Both.

It’s Thursday, so I’m on tap to discuss the unusual options activity of a single stock. In Wednesday’s trading, Nio had the highest Vol/OI ratio at 69.17. 

While the Nov. 15 $8 call does have some appeal for investors bullish about the EV maker’s future -- the ask price of $0.56 is a reasonable down payment of 7% to buy 100 shares at $8.56 -- two other stocks in the top 25 have caught my attention. 

As a Canadian, I couldn’t resist a little content from my home country. 

I’m speaking about Enbridge (ENB), the Alberta-based pipeline company. Its May 17 $37.50 call had a volume of 2,326, 20.23x its open interest. That put it 22nd in unusual options activity on Wednesday. It’s important to note that I never include options expiring in less than seven days. 

The second unusually active option is Capri Holdings’ (CPRI)May 17 $37.50 put with a Vol/OI ratio of 28.80. The owners of luxury brands Michael Kors, Versace, and Jimmy Choo have not performed in recent years. Its stock is down 9% in 2024 and up less than 5% over the past five years. You’re not going to get very far with those measly gains. 

As I said, I typically discuss one unusually active option, but I like both for different reasons, so I'm going with two.

Here’s why I like each of the options. 

Enbridge Hasn’t Delivered for Shareholders

Like Capri, Enbridge stock has lost 1% of its value over the past five years. However, thanks to its dividend, the annual total return is 5.7%, still significantly less than both Canadian and U.S. indexes. 

Forget its business for a moment and consider the ENB call. 

Coincidentally, both expire in 57 days. They also, coincidentally, have a $37.50 strike price even though one’s a call and the other’s a put. As I  already said, the 7% down payment is reasonable, if not low. To consider exercising your right to buy, its share price must increase by 5% over the next two months. 

Is it possible? Sure it is. Its share increased by 10% in the final two months of 2023. Of course, the S&P 500 was up nearly 14% in the same period, which takes a little air out of one’s argument. 

Given a delta of 0.24821, you can double your money if the share price goes up by $1.41, or 3.9%, based on Wednesday’s closing price of $36.09. 

So, with a relatively low $35 initial output, the risk is minimal, while the opportunity to double your money or buy its shares at a reasonable entry point—as recently as June 2022, it traded over $46 —is a real possibility. 

As for the business, the 18 analysts covering its stock rate it a Moderate Buy (3.72 out of 5), with a $40.16 target price, 11% higher than Wednesday’s closing price.  

The EPS estimate for 2024 is $2.11 and $2.22 in 2025. Based on yesterday’s closing price, it trades at 17.1x 2024 EPS and 16.3x 2025 EPS. According to Morningstar.com data, Enbridge’s five-year average P/E and forward P/E ratios are 23.3x and 16.9x, respectively, suggesting it’s a decent value play. 

One more thing. Its free cash flow in 2023 was $9.33 billion, or 6.8% of its $138.16 billion enterprise value. Anything between 4% and 8% is fair value, while over 8.0% is value territory. 

If it’s not a value play, it’s close.

Capri Has Also Dropped the Ball for Shareholders

The company’s overall business is not performing at the top of its game. 

In Q3 2024, its revenue fell 5.6% (6.6% excluding currency) over a year ago to $1.43 billion, while its operating income declined 48.3% to $122 million. Revenues were down across all three of its brands—Versace (-10.8%), Michael Kors (-6.2%), and Jimmy Choo (-3.0%)—as consumers scaled back their luxury purchases. 

In calendar 2024, Tapestry (TPR), the owner of Coach, Kate Spade, and Stuart Weitzman, is expected to complete its $8.5 billion acquisition of Capri. 

I say expected because there is still doubt that the deal will cross the finish line. 

Bloomberg reported in early January about the merger-arbitrage opportunity available to investors. 

"I still like CPRI for a merger arb,” Bloomberg reported Bill Gross’s comments on X in January. Gross is the co-founder and former chief investment officer of Pacific Investment Management Co. (PIMCO). 

Tapestry’s offer is $57 a share. Capri’s $45.75 closing price is 20% lower than that, suggesting investors don’t believe it will happen. The fact that the Federal Trade Commission is investigating the details and merits of the transaction doesn't help. 

In a January article, Bloomberg reported that Jones Trading merger-arb specialist Cabot Henderson projected Capri’s share price would fall to $28 or $29 should the deal not go through. That’s 38% lower than where it’s currently trading.

I think the FTC will give it the green light, and the deal will be consummated, although probably not by the middle of May. As such, I don’t think a seller of the $37.50 put should worry too much about having to buy the shares at $36.65 in 57 days. 

In the meantime, the annualized yield is 12.2%, a reasonable risk/return income proposition. That said, it’s not everyone’s cup of tea.

I like building a U.S.-centric luxury conglomerate to compete with LVMH (LVMUY)and Kering (PPRUF).