Unusual Call Options Activity In SNAP Stock - Investors Turning Bullish?

A Barchart report today shows unusually large volume in out-of-the-money (OTM) call options in SNAP Inc. (SNAP) stock. Could investors be turning bullish ahead of its Nov. 4 earnings release date?

SNAP is trading at $6.41 at midday on Monday, Oct. 12. It's been rising lately, up from a recent low of $5.22 on Sept. 28 and a three-month low of $4.35 on July 24. Investors and analysts are getting more positive on the social media company's prospects.

SNAP stock - last 3 months - Barchart - Oct. 12

Investors and Analysts Seem Bullish on the Stock

For example, 42 analysts now have an average price target (PT) of $7.40 on SNAP, according to Yahoo! Finance. Moreover, Barchart's mean analyst survey PT is $7.55. 

This implies that they see 15.4% to 17.8% upside in SNAP stock. 

However, much will depend on how well its earnings and cash flow prospects play out for Q3 on Nov. 4. For example, Seeking Alpha reports that analysts expect to see $1.73 billion in revenue, up from $1.6 billion last quarter. In addition, they forecast $0.16 in earnings per share (EPS), up from $0.13 last quarter.

However, all eyes will be on its free cash flow (FCF) performance. Last quarter, FCF dropped to $120.54 million from an all-time high of $286 million in Q1. Moreover, the FCF margin dropped to 7.54%, down from the Q1 FCF margin of 18.71%.

Management seems to prioritize optimizing FCF, based on comments they made during the Q2 earnings conference call. That means they may be attempting to lower costs and raise revenue.

That may be why investors are getting bullish on the stock. It could also account for today's huge out-of-the-money (OTM) call option volume.

Heavy Unusual Call Options Volume in SNAP

This is seen in today's Barchart Unusual Stock Options Activity Report. It shows that 28,600 call options have traded at the $8.00 strike price for expiration on Dec. 18, 2026. That is 67 days from now, over two months.

Moreover, the premium paid was 35 cents. That means that investors in these call options expect that SNAP will rise above $8.35 (assuming they hope to exercise their options). That's almost $2.00 higher, or 30.2% above today's price.

Of course, they could also be speculating that as SNAP stock rises, the value of the call options will skyrocket, especially if it approaches $8.00.

The bottom line is that these calls are out-of-the-money (OTM). That means they have no intrinsic value right now and won't have any until SNAP hits $8.00.

Sellers of these calls, most likely existing SNAP stockholders or call credit spread investors, are happy to collect the 35-cent income. That works out to a covered call yield of 5.46% over the next two months (i.e., $0.35/$6.41).

Moreover, even if the stock rises but doesn't hit $8.00 by Dec. 18, these covered call holders get to keep the income as well as the capital gain. So, in effect, they are bullish on the stock as well, since they will have to hold their shares to cover the potential sale obligation.

The bottom line is that investors are hoping that Snap Inc.'s Q3 earnings release will show strong revenue, earnings, and free cash flow growth.

However, investors should be careful in buying these calls. This trade is highly speculative, and investors could lose all of their investment. 

That could be the case if SNAP stock falls after the earnings release. That is not uncommon, as the old market adage shows: “Buy on the rumor and sell on the news.”