Looking at circumstances from a wide-angle lens, Papa John’s (PZZA) appears a compelling idea given the circumstances. Yes, a surge in hiring last month defied economists’ expectations. Still, the average U.S. household continues to struggle amid stubbornly high inflation and ongoing layoffs, presenting cynical opportunities for low-cost product and service providers. Still, PZZA stock presents a nuanced argument that requires a sophisticated approach.
On the positive front, Papa John’s should largely benefit from the trade-down effect. When faced with financial pressures, consumers don’t always cut their spending cold turkey. Instead, they trade down to cheaper alternatives until an acceptable equilibrium is found between quality and price. While many Americans have indulged in premium experiences – based on the post-pandemic retail revenge phenomenon – it’s generally easy to cut back on such luxuries.
In fairness, Papa John’s is also vulnerable to the trade down. Simply put, people can stop going out to restaurants or ordering takeout and instead, shop at the local grocery store with the intention of cooking at home. Nevertheless, with the September jobs report coming in so hot, that’s a major indication that people are still willing to open their wallets for relatively sensible purchases.
Still, PZZA stock isn’t completely devoid of challenges. Most prominently, investors started asking serious questions about the underlying enterprise based on its second-quarter earnings report. For one thing, Papa John’s posted revenue of $515 million, down 1.5% against the year-ago quarter. More worryingly, total comparable sales fell 1.3% year-over-year, resulting from poor franchisees comps performance and a challenging operating environment, per Zacks Equity Research.
Over the past month, PZZA stock has looked incredibly ugly. Now, the question is, will shares eventually recover? The options market seems to say yes, although it’s a difficult nut to crack.
Unusual Options Volume for PZZA Stock Warrants Closer Examination
Following the final session last week, one of the most unusual options activity in terms of volume trends came from PZZA stock. Specifically, total volume reached 8,633 contracts against an open interest reading of 31,897 contracts. Further, the delta between the Friday session volume and the trailing one-month average metric came in at 491.71%.
However, what really stood out was the transactional break down. Call volume landed at only 1,000 contracts while put volume clocked in at 7,633 contracts. On paper, this pairing yielded an unsightly (if you’re a long-side trader) put/call ratio 7.63. Notably, the put/call open interest ratio also hit 3.91, indicating more demand for puts than calls.
From a face-value reading, it’s easy to regarding this framework as bearish against PZZA stock. After all, more puts means more stakeholders that have the right (but not the obligation) to exercise the underlying contract; in this case to sell PZZA at the listed strike price. Nevertheless, others must be willing to write (sell) said puts, adding a wrinkle to this narrative.
Throughout the back half of August to Oct. 3, Fintel’s options flow data – which screens for big block trades likely made by institutions – reveals mostly sold puts across various strike prices with expiration dates of Oct. 20 and Nov. 17. This canvas suggests that major traders are egging on retail participants to bet against PZZA stock.
So long as shares don’t materially fall to or significantly below the listed strike prices, these put writers can collect their premiums and end the trade profitably. However, PZZA stock has been crumbling over the trailing month, raising concerns about the viability of the puts.
For example, on Aug. 17, a major trader or traders wrote 3,050 contracts of the Oct 20 ’23 70.00 Put. At the time, implied volatility (IV) for the put sat at 36.24% and the delta was only -0.2279. On Friday, the IV shot up to 60.11% and the delta “rose” to -0.7567.
That’s great if you’re the put buyer; not so much if you’re the put seller.
Possible Pain to Come?
Assuming that the sold puts stemmed from retail traders, investors probably wouldn’t have to worry too much about mitigating actions that could lead to even lower prices for PZZA stock. For example, a trader could buy protective puts – or puts at lower strike prices to choke off the risk from the original puts – to limit loss exposure. In theory, this action could spark a downward sentiment acceleration.
However, the harsh reality is that retail traders generally exert little to no influence on broader market dynamics. Of course, the lingering issue now with PZZA stock is that the sold puts stem most likely from institutional traders; otherwise, the trades wouldn’t be big enough to trigger the options flow screener. If major entities decide to mitigate their losing trades, the subsequent actions could hurt PZZA.
So, whether you’re interesting in investing in Papa John’s through open market acquisitions or trading its derivative contracts, you want to be careful. Yes, the options flow data does seem to suggest a bullish floor exists in PZZA stock. However, an institutional panic could lead to even more pain. Therefore, conservative investors may want to wait for a better read – or a better deal.
On the date of publication, Josh Enomoto 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.
