When investors want to measure the market's exposure to an individual stock to gauge sentiment and potential future moves for that name, they usually think in terms of shares bought or sold. However, there is another way that traders gain exposure to any given stock, which means a lot more when it comes to sending a message.
Through stock options, traders gain the benefit of leverage. However, that benefit does come at a cost, just like any other. That cost, the trade-off, comes from the timing aspect of an options trade. Since options contracts have an expiration date, traders need to not only be right in the direction of their bets but also get the timing right if they want to avoid a total loss.
Knowing that the stakes are higher for options, spotting an unusual volume of call options (betting on the stock rallying) for shares of basic materials stock Albemarle Co. (NYSE: ALB) poses an opportunity to reverse engineer some of the reasons why traders are betting on this lithium stock going higher. As it turns out, very good fundamental factors confirm this trade is carrying up to a double-digit upside.
Why Analysts Project Double-Digit Gains for Albemarle Stock
Without getting into the weeds of the macro picture, all investors need to know is that the United States has the potential for inflation to return. Both Stanley Druckenmiller and Paul Tudor Jones have appeared on Bloomberg and CNBC to express their bullishness for commodities and bearishness for bonds.
This view means that both of these mega investors expect a higher level of inflation in the coming quarters, which will be good for all dollar-quoted commodities, including lithium. There is another driver in lithium as well.
If inflation does make a comeback, electric vehicle makers like Tesla Inc. (NASDAQ: TSLA) will see more demand from fuel costs, making them an attractive alternative. This is where Albemarle comes into play as a lithium miner and provider.
Knowing this, it shouldn’t surprise to see Wall Street analysts land on a $117.3 price target for Albemarle stock, calling for up to 20.9% upside from where the stock trades today. However bullish this may be, the stock still trades at only 61% of its 52-week high, which is why other analysts think it should be valued much higher.
Evercore recently reiterated its “Overweight” rating for Albemarle stock while keeping a price target of as high as $170 a share. To prove these new ratings right, Albemarle would have to rally by as much as 75% from today’s prices, which is more reflective of the true upside this stock can offer.
To back up this much upside, analysts also project the stock to deliver up to $6.18 in earnings per share (EPS) in the next 12 months, significantly higher than today’s $0.04 EPS. When investors compare this EPS growth versus today’s price targets, it would be logical to expect analysts to boost their valuations on the stock soon enough.
What Options Traders Are Betting on for Albemarle Stock
As of this month, a few unusual call option volumes were spotted, with 9 call trades bringing in as much as $501,000 worth of value. Investors need to keep in mind the direction these traders are betting Albemarle will head toward.
The majority of the contracts bet on Albemarle heading to $130 a share soon, which might be an earnings play or a reaction to the rising bond yields currently sending bond ETFs lower, as seen in the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT). As this calls for inflation, it would be good for lithium prices and Albemarle’s margins.
Another sentiment gauge investors can keep track of is institutional buying, which has been aggressive lately. International Assets Investment Management decided to boost its holdings in Albemarle stock to a high of $155 million today.
Considering that this purchase was made in mid-October 2024, investors can see the timing of the allocation relatively close to the other price actions across the market. Still, this is only a drop compared to the $3.6 billion in capital that made its way into Albemarle stock over the past 12 months.
Last but not least, recent price action would show investors some of the market’s reaction to the news of both traders buying call options and institutional buyers jumping into Albemarle stock. To start the new week, the stock rallied by as much as 5% to set the tone and confirm that more participants are becoming bullish on this lithium play today.