Paramount–Skydance Sees Unusual Options Activity — 3 Strategies to Cash In

It's been one week since Paramount Global merged with Skydance Media to form Paramount Skydance (PSKY), an entertainment business with revenues expected to reach over $30 billion in 2025. Its shares are up 48% since Monday’s close.

While there is no shortage of opinions, bullish and bearish, about the merged entity’s future trajectory, I don’t think there’s any doubt PSKY will be a favorite of retail investors everywhere. It’s got all the hallmarks of a meme stock: a cheap share price, a significant short interest (13.4% as of Monday), and a massive trading volume (over 10x its 65-day average yesterday).

In the past, I’ve spoken about my interest in the movie theater business. That’s the result of my grandfather’s job running a large Canadian movie theater chain in the 1960s. Paramount’s former parent, Viacom, owned it until selling it to Cineplex (CGX.TO) in 2005.

Suffice to say, I’m fascinated by the entertainment business, even though movie theaters are unable to generate consistent profits. Just ask AMC Entertainment (AMC) investors about this shortcoming. But I digress.

As I mentioned, PSKY stock had 18 unusually active options yesterday – nine puts and nine calls, a slightly bearish indicator — with nearly 507,000 contracts traded on the day, significantly higher than its average daily volume.

Warren Buffett once owned Paramount stock. It’s unlikely that while he’s still around, Berkshire Hathaway (BRK.B) will be buying, but you never say never.

Whether you’re bullish or bearish, there’s an options trade to be made to cash in on the increased interest in PSKY stock.

I’ve always had a soft spot for Paramount, although I’ve never owned its stock. In May 2023, I wrote about some of its positives, pointing to several options strategies to benefit from its actual intrinsic value. It remained undervalued in my opinion.

“Paramount is a name that’s been a part of American life since 1912. It's as American as apple pie. It’s had several owners over the years and will probably have several more over the next 111 years. It isn’t going anywhere,” I wrote in 2023.

“Whether it gets taken private, is acquired by Berkshire (wishful thinking), or muddles along as a public company, it will always possess intrinsic value beyond its current market cap, which is why I’m talking about its options.”

I suggested that it was unlikely to trade below $10 in the future. Except for two days: June 17, 2024, and June 18, 2024, it hasn’t in the past 26 months. I expect that $10 will remain a floor for the stock in the years ahead, unless something negative and unforeseen happens to change the investment thesis.

So, paint me in the bullish corner. Unfortunately, significant gains over the past two days mean investors buying now might have to be a little patient.

The most obvious bullish move would be to buy a call. There were nine unusually active calls yesterday.

As you can see from above, there was a mix of DTEs (days to expiration) from a high of 129 to a low of nine. Note that the unusually active options are those that expire in seven days or longer with Vol/OI (volume-to-open-interest) ratios of 1.24 or higher.

Unless you’re looking for a quick profit, the nine-day DTEs are probably too short a duration.

The Aug. 29 $15 call expiring in 16 days is right at the money. The $1.53 ask price is a reasonable 10.2% of the strike price. There is a 36.07% chance PSKY will be $16.53 (breakeven) or higher at expiration. $153 per contract isn’t going to break the bank. It’s a reasonable bet.

The two 37-day DTEs are both out of the money and significantly cheaper at $1.15 and $0.53 for the $17 and $20 calls, respectively. Of the two, I like the $17 strike. It has a 26.89% profit probability, but it is only 6.8% of the strike price, so you’ll pay less for three additional weeks.

Lastly, we’ve got a $20 call expiring in 129 days on Dec. 19, just before Christmas. Costing $1.07 or 5.4% of the strike price, it’s definitely cheap, but requires a 40.47% move to break even. That’s a tall ask.

Of the four calls discussed, I’d be inclined to go with the Aug. 29 $15 call or the Sept. 19 $17 call.

It depends on how bearish you are. I’ll assume that you believe the nearly 50% gain over the past two days is overdone. Maybe you see its near-term price around $12.50 to $13, making you neutral to bearish.

If that’s the case, you might do a bear call spread. This involves selling a call option and buying a call option at a higher strike price. Given the five calls expiring in nine days and two expiring in 37, you’ve got plenty of possibilities. That said, few of them will generate significant profits.

Of the ones expiring in nine days, the highest maximum profit would be to sell the $13.50 call with a bid price of $1.57 and buy the $15 call with a $1.37 ask price. The maximum profit would be $0.20 [$1.57 bid price – $1.37 ask price]. The maximum loss would be $1.30 [$13.50 – $15 + $0.20]. With a risk/reward ratio of 6.5 to 1 and a maximum profit percentage of around 15%, your profit probability is not good.

However, as I write this about an hour into Thursday’s trading, the bear call spread on the $13.50 and $15 calls has improved due to a fall in its share price. The risk/reward ratio is 2 to 1 with a maximum profit percentage of 50% and a profit probability of 47.1%. For a maximum loss of $100, it’s not a bad bet.

If you’re really bearish about Paramount Skydance stock, you might do a bear put spread. It involves buying a put option and selling a put option at a lower strike price. As mentioned earlier, there were nine unusually active put options from yesterday’s trading.

As you can see from the eight above, the puts also have a variety of DTEs. However, you’ll want to keep the DTE reasonably short, say between 21 and 45 days, thereabouts. That leaves us with one at nine days ($13 strike) and two at 37 ($12 and $13 strikes).

The most obvious play is to buy the $13 put and sell the $12 put expiring on Sept. 19.

In this case, you buy the $13 put for $1.02 (ask price) and sell the $12 put for $0.60 premium (bid price) for a net debit of $0.42. So, the most you can lose on this bet is $42. You make money if the share price is below $12.58 at expiration. There’s almost no risk to this bet with a risk/reward ratio of 0.72 to 1.

If you’re bearish, mild or extremely, the bear put spread appears to be the better of the two spread bets.

On the date of publication, Will Ashworth 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. This article was originally published on Barchart.com