Today, there is a high volume of out-of-the-money (OTM) put options activity in Lam Research Corp. (LRCX) for a longer-dated expiry. That highlights the underlying value of LRCX stock, which could be worth 27% more.
LRCX is at $376.19 in morning trading on June 16, down 2.6%. The stock is off its recent peak of $388.92 set yesterday. Today's unusual put option activity in this semiconductor processing equipment company stock could indicate that some investors think LRCX is due for a fall.
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LRCX stock - last 3 months - As of June 16 This can be seen in today's Barchart Unusual Stock Options Activity Report. It shows that a massive amount of put options at the $340 strike price have traded for expiry on Sept. 18, which is 94 days from now.
The 22,649 put option contracts are over 145 times the prior number of options outstanding (OI) at that strike price. This is the highest Vol/OI ratio in the Barchart table.
LRCX puts expiring Sept. 18 - Barchart Unusual Stock Options Activity Report - June 16, 2026 Moreover, the put option premium is very high, $36.00 at the midpoint. That represents a 10.58% put yield ($36/340.00) for a short-seller, even though the strike price is over 11% below today's trading price.
This means that a short-seller, after posting $34,000 in collateral with their brokerage firm, immediately receives $3,600 in income after entering an order to “Sell to Open” 1 put contract at $34.00.
As a result, the monthly income rate is 3.527% (i.e., 10.58%/3). This is an extremely attractive rate for short-sellers.
Moreover, even if LRCX falls to $340.00 by Sept. 18, the investor's potential buy-in point is much lower:
$340.00 - $36.00 = $304.00 breakeven point (BP)
That BP is $75 below today's price, or -19.8% lower. That allows value investors doing this play to set a very attractive buy-in point.
Moreover, the upside is quite high, based on the company's strong free cash flow (FCF) and FCF margin outlook. Let's look at its underlying value.
Lam Research's Strong FCF
Lam Research produces semiconductor processing equipment. The whole industry is in the middle of an AI-related boom. This is reflected in the company's recent performance and the outlook provided by management.
For example, on April 22, management reported 9.3% Q/Q revenue growth and a higher operating margin of 35% vs. last quarter's 33.9%.
In addition, it generated positive free cash flow of $809.8 million after higher capex. This was even though it was lower than last year's $1.021 billion, according to Stock Analysis.
However, over the past year, its FCF of $6.0 billion exceeded last year's TTM FCF of $4.347 billion. In addition, it represented 27.7% of trailing 12-month (TTM) revenue, despite higher capex, compared to 25.37% a year ago.
Nevertheless, the recent quarterly FCF margin was just 13.9%, compared to 21.6% a year ago. However, investors should look at the company's trailing 12-month (TTM) performance, given seasonal and typically higher Q4 results.
As a result, let's use a conservative 25% FCF margin in our forecast.
Forecasting Lam Research's FCF and Fair Market Value (FMV)
For example, for the fiscal year ending next June 2027, analysts are now projecting 32% higher revenue at $30.54 billion.
So, using a 25% FCF margin, we can expect to see at least $7.6 billion:
$30.54b x 0.25 = $7.635 billion FCF FY 2027
That is 27.3% higher than its TTM FCF of $6 billion as of fiscal Q3 ending March 31. It implies that the Lam Research stock's fair market value could be significantly higher over the next 12 months (NTM).
For example, LRCX's market cap today is $465.8 billion, according to calculations by Yahoo! Finance. That implies its FCF yield is about 1.3%:
$6b TTM FCF / $465.8b = 0.01288 = 1.288% FCF yield
So, applying this to my $7.6b FCF estimate for next year, its fair market value (FMV) will be 27% higher:
$7.635b /0.0129 = $591.9 billion FMV
$591.9b / $465.8b = 1.271
This implies that the price target for LRCX stock is $478 per share (i.e., $376.19 x 1.27).
However, other analysts have much lower price targets. For example, Yahoo! Finance reports that the average of 36 analysts is only $323.38 per share, and Barchart's survey price is only $325.60.
That could explain why there is such heavy put option trading today.
Summary and Conclusion
These out-of-the-money (OTM) puts can give investors a significantly lower potential buy-in point and a good income-earning play.
For example, even if LRCX falls to below $340.00 on or before Sept. 18, the investor shorting these puts has a net buy-in of $304.00.
At that price, the potential upside is significant, even though if LRCX falls below that price, the investor could end up with an unrealized capital loss.
For example, my price target of $478 would give an investor an expected return of 58.8% (i.e., $478/$304-1 = 1.588 -1 = +58%). Even using the Barchart survey price target implies a 7.1% expected net return (i.e., $325.60/$304.00).
The bottom line is that LRCX looks undervalued here, although that is not the uniform consensus of other analysts. Shorting these OTM puts is an excellent way to earn extra income over the next 3 months and potentially set an attractive buy-in point.
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.
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