Fluor Corp Shows Unusual Call Options Activity From Bullish Investor

Fluor Corporation (FLR) stock is showing large unusual call options activity for the period ending April 21. This is likely from a large bullish investor in the engineering firm assuming earnings will rise in 2023. The indications of this activity come from Barchart’s Unusual Stock Options Activity Report on Jan. 11, 2023.

The report shows that some investor has bought 5,000 contracts in FLR call options for expiration on April, 21. The reason why it is likely the initiating action for this trade was likely from a buyer of the calls is that the strike is only slightly over the existing stock price.

For example, the strike price is set at $37.50, or just $3.10 over today’s price, as of midday Jan. 11, of $34.40. That means that the stock has to rise just 9.0% before the call options are in-the-money. Since the call options have 99 days before expiration, the investor figures that is highly likely to happen. 

As a result, they were willing to pay $2.00 for that call option. That raises their breakeven price to $39.50, or just $5.10 over today’s price. That represents a rise of 14.8% (i.e., $39.50/$34.40-1) in order for the institutional investor to make money.

The above report shows that this volume of 5,000 call contracts is over 27x times the existing open interest (OI) from existing holders in the call options at that strike price.

Why These Calls Make Sense

Why would they do this? Two reasons seem likely: the cheap valuation and the leverage effect of buying long calls.

For example, right now 9 analysts surveyed by Seeking Alpha forecast that earnings per share (EPS) will rise 76% in 2023 to $1.62 over the EPS estimate of 92 cents for the year ending Dec. 2022. That puts FLR stock, at $34.40 today, at just 21x earnings. This is because Fluor, the largest engineering and construction company in the Fortune 500, is likely to benefit from new oil and gas as well as mining construction projects in the near future.

Given that Morningstar reports that the average historical multiple for FLR stock is 45x over the past 5 years, this means that the stock could be undervalued. For example, its 2022 multiple is 37.3x. However, the forward multiple average is 17.6x, which is slightly lower than its present 21x forward multiple. 

As a result, it’s possible that the stock might have some room to rise. By the end of 2023, for example, if it is likely that the $1.62 EPS target will be met, the stock might be at $72.90, or 45 times the $1.62 EPS estimate for 2023. That represents a potentially huge gain, possibly even a doubling in FLR stock. This is why the investor might want to buy calls now.

Another reason is the huge leverage effect that call options provide in this stock. I have described this effect in previous articles on long-dated call option trades. For example, the 5,000 contracts which cost $2.00 per call is like buying 500,000 shares at $2.00, an investment of $1 million (i.e., $2.00 x 100 x 5,000). But if the investor bought $1 million worth of FLR stock, there would be just 29,069 shares in the account (i.e., $1,000,000/$34.40).

So, if the stock rises by 50% to $51.60, after it announces the latest earnings and Q1 earnings are also evident, the long stock investor will make $500K (i.e., $17.20 x 29,069). But the long call investor will see the call price rise to $14.10 (i.e., $51.60-$37.50 strike price). Since the investor paid just $2.00 for that call price their profit is $12.10 per call, or $6,050,000 (i.e., $12.10 x 5,000 x 100). That means that their profit of $6.05 million is 12.1x times what they could have made in the same period holding FLR stock.

This shows that investors in long calls in FLR stock expect to make a large return in the next three months.

More Stock Market News from Barchart

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here