3 Tasty Pre-Earnings Options Strategies

by Joseph Hargett | April 24, 2012 8:48 am

Cheesecake Factory (CAKE)[1]If you already have an eye on the restaurant group, then you are aware of how full your plate will be this week. From spicy wings to paninis to cheesecake, casual dining companies already have their reservations for the earnings confessional, and Wall Street will be paying close attention to the results.  An unseasonably warm start to 2012 should have drawn more diners out of their homes, but spending may have been impacted by rising gas prices. Finally, with growth slowing overseas (especially in China), many restaurateurs could see their bottom lines impacted due to weakness overseas.

Buffalo Wild Wings (NASDAQ:BWLD[2])

Fresh off of March Madness – Go Big Blue! – sports bar and purveyor of spicy wings Buffalo Wild Wings will step into the earnings limelight after the close of trading this afternoon. Wall Street is expecting a first-quarter profit of 95 cents, up 17% from a year ago, while revenue is seen rising 37% to $249.8 million.  High food costs, including unusually high chicken prices, may cut into BWLD’s quarterly profits, but this hasn’t deterred investor expectations, with the whisper number arriving at $1.00 per share.

But these whispers are not reflected in BWLD’s sentiment backdrop. For instance, the stock has attracted only five “buy” ratings, compared to nine “holds,” and two “sells.” Additionally, more than two million BWLD shares have been sold short, accounting for a hefty 11% of the stock’s total float. Even options traders have jumped on the bearish bandwagon, with BWLD’s front-month put/call open interest ratio of 2.25 revealing that puts easily outnumber calls in the May series of options.

Technically, BWLD gapped sharply higher following its fourth-quarter earnings report in early February, but the shares failed to capitalize on those gains. Still, the shares have held on to their post-earnings gap, and are currently consolidating into support near $80. This region could provide a springboard for BWLD following tonight’s quarterly report.

Traders interested in getting in ahead of the event might want to consider a BWLD May 80/85 bull call spread (buying the 85 call and selling the 85 call for a net debit). This trade was offered at $2.70, or $270 per pair of contracts, at the close on Monday. Breakeven lies at $82.70, while a maximum profit of $2.30, or $230 per pair of contracts, would be realized if BWLD closes at or above $85 when May options expire.

Continue reading for two more earnings-related options trading ideas … 

Panera Bread Co. (NASDAQ:PNRA[3])

Panera Bread Co. will join Buffalo Wild Wings in the earnings confessional after the close tonight.  Wall Street analysts are expecting first-quarter earnings to soar 24% to $1.35 per share, with sales forecast to rise 19% to $500.67 million. The whisper number arrives a bit higher at $1.36 per share.

In the fiscal fourth quarter, Panera beat earnings expectations but came up short on revenue, and investors punished the stock. PNRA shares have recovered nicely from the beat down, with the stock gaining along support from its 10-day and 20-day moving averages.

However, the shares stagnated near $160 in March, and PNRA was shocked lower once again following news that John Maguire, the company’s COO of 19 years, will retire. The stock closed Monday below former support at $150, with the recent plunge placing the shares in potentially oversold territory.

Sentiment, while far from outright bearish, does have room for improvement. For instance, 12 of the 24 analysts following PNRA rate the stock a “hold” or worse, while about 3.3% of the stock’s float is sold short. Options traders are also negatively aligned, with PNRA’s front-month put/call open interest ratio arriving at 1.66.

For a pre-earnings PNRA options strategy, traders might want to consider betting against the trend, especially considering the potential for unwinding bearish sentiment and an oversold condition for the stock. Along those lines, the PNRA May 150/160 bull call spread looks promising. This trade was offered at $3.60, or $360 per pair of contract, at the close of trading on Monday.  Breakeven lies at $153.60, while a maximum profit of $6.40, or $640 per pair of contracts, is achieved if PNRA closes at or above $160 when May options expire.

The Cheesecake Factory (NASDAQ:CAKE[4])

Saving dessert for last, The Cheesecake Factory will step up to release its first-quarter earnings figures after the close of trading tomorrow night. The brokerage community has forecast a 5.9% rise in earnings to 36 cents per share, while revenue is seen climbing 5% to $439.85 million. The whisper number arrives a penny higher at 36 cents per share.

Sentiment is surprisingly negative on CAKE. Who doesn’t like CAKE? Apparently no one, as analysts, short sellers, and options traders are all betting heavily against the stock. Specifically, Wall Street has doled out 18 “hold” or worse ratings, versus just 10 “buys,” while a whopping 19.5% of CAKE’s float is sold short. In the options pits, the front-month put/call open interest ratio skews bearish with a reading of just above 1.0. In other words, there are more open puts than calls on the stock.

Technically, CAKE is pinned between support at its 200-day moving average (near 28.61) and resistance at its 50-day trendline (near 30.11). This weak price action began in the wake of the company’s poorly received fourth-quarter earnings report, which ended a rally of more than 30% between October and February. CAKE could still resume its former uptrend, but the company will need to firm up on its guidance.

Those looking to take a bullish stance ahead of CAKE’s quarterly report will want to be mindful of overhead resistance. As such, a CAKE May 30/32 bull call spread could provide a sweet return.  This trade was offered at 80 cents, or $80 per pair of contracts, at the close on Monday. Breakeven lies at $30.80, while profit maxes out at $1.20, or $120 per pair of contracts, if CAKE closes at or above $32 when May options expire.

As of this writing, Joseph Hargett does not own any shares mentioned here. 

  1. [Image]: https://investorplace.com/wp-content/uploads/2012/04/3181560716_05c133460b.jpg
  2. BWLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BWLD
  3. PNRA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PNRA
  4. CAKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAKE

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