While Monday was a bloodbath for most equities, the market wasn’t completely devoid of winners. One standout performer was movie theater owner and operator Cinemark (NYSE:CNK). On the surface, an enterprise with fading relevance to the consumer would seem problematic. However, CNK stock not only gained nearly 10% so far this week but shot up almost 14% in the past 5 trading days. Even better, it might not be done with its northward trek.
Catapulting sentiment was the company’s surprisingly robust second-quarter earnings report. Per MarketWatch, Cinemark posted net income of $45.8 million or earnings of 32 cents per share. This figure beat the consensus view of 8 cents. On the top line, the cineplex operator generated sales of $734.2 million, exceeding the forecast calling for $692 million.
To be fair, these results represented a sharp decline from one year ago, when Cinemark posted earnings per share of 80 cents on sales of $942.3 million. Still, popular films such as Inside Out 2 – subsequently becoming the biggest animated title of all time – helped invigorate results.
As such, InvestorPlace Reporter Samuel O’Brient noted that Wall Street analysts are pounding the table on CNK stock. Several analysts have raised their price targets, with the latest assessments placing the expected price per share between $28 to $31. Yesterday, Cinemark closed at $26.19 – and there could be more upside in the mix.
Options Activity Clashes with the Implications of a Possible Short Squeeze
Although enthusiasm has been strong for CNK stock, the smart money appears to be betting against the box office operator. According to Barchart, the net trade sentiment in Cinemark’s options flow screener sits at $2.7 million below breakeven, thus favoring the bears.
Options flow focuses on big block transactions likely placed by institutional or professional investors. It cuts out the white noise that retail investors may generate and instead puts the spotlight on the most significant transactions. That way, investors have a better understanding of the true sentiment of the smart money.
Interestingly, most of the bearish options appear to be sold calls with expiration dates and strike prices ranging from $17.50 to $27. If CNK stock stagnates and drops to these levels, the call seller (or writer) would be able to collect maximum premiums. Premiums are essentially the “service price” for writing the underlying option.
Despite the negative implications behind the sold calls, CNK stock could still rise on a possible short squeeze. Per Fintel, Cinemark’s short interest stands at 27.07% of its float. Further, the short interest ratio – or the number of trading sessions required for the bears to unwind their short exposure – comes in at 6.42 days to cover.
Bearish traders initiate a short position by first borrowing the target security, then selling it in the open market. Once the security falls in value, they buy the borrowed amount at a cheaper price, returning the borrowed shares and pocketing the difference as profit. However, a rising stock could force short traders to pocket losses; thus, it’s imperative to exit as soon as possible.
The ensuing rush for the exits is what’s known as a short squeeze.
Trade of the Day: Buy $30 CNK Calls
For those interested in high-risk, high-reward ideas, CNK stock call options appear compelling. Specifically, the 2025 Jan. 17 $30 call should be on your radar. While this option suffers from a wide spread due to relatively low volume, several factors make this trade a tempting one:
- Cinemark is bucking the trend of fading relevance at the box office with contextually strong financial results.
- A short squeeze typically creates a sense of panic and that could lead to a blistering run in the equity.
- Three analysts are now calling for CNK stock to hit $30 or higher.
Plus, it must be said that $30 is an attractive psychological target. This price point is also near a long-term support line that has been in place since 2013. That doesn’t guarantee anything but it’s almost certain that the bulls will be targeting this level.
With the help of a short squeeze, anything is possible.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
