A strong earnings report and upgraded forward guidance typically yield unusual options activity – that’s usually how this works. However, for fast-casual restaurant chain Cava Group (CAVA), betting on continued upside seems risky. Yes, CAVA stock deserves the praise that it got. But after popping nearly 20% in one day, how much more can this equity give?
It’s a valid question. Market data shows that CAVA stock peaked on Friday early afternoon. Since then, it gradually slipped from an intraday high of $125.87 to its closing price of $122. During the afterhours session, it managed to move up but by only 0.32%. It’s quite possible that the market will respond positively to Cava’s strong fiscal second-quarter earnings report. Still, a double-digit gain seems like it’s off the table.
To be sure, Cava’s financial performance during the last quarter was impressive. Per CNBC, earnings per share landed at 17 cents, beating the consensus view calling for 13 cents. On the top line, the company generated revenue of $233 million, also exceeding analysts’ target, in this case calling for $220 million. Comparable sales also popped 14.4%, thanks to management reporting 9.5% traffic growth.
Even more impressive, the underlying strength of CAVA stock appears to have moved against the negative implications of the recent jobs downgrade. Per updated federal data, the U.S. economy added 818,000 fewer employment opportunities from April 2023 to March 2024 than originally reported. This framework suggests that the Federal Reserve may need to lower interest rates to avoid a recession.
Still, betting on CAVA stock now after it’s already gained so much might not be so smart. That’s where the derivatives market comes into play.
CAVA Stock Predictably Pings the Unusual Options Screener
Predictably, CAVA stock represented a key highlight in Barchart’s screener for unusual stock options volume. This data interface focuses on equities that have attracted the attention of the smart money, thus providing clues to retail investors as to what the professionals are eyeballing.
Following the close on Friday, CAVA stock options volume hit 251,915 contracts, a stunning figure compared to its open interest of 190,719 contracts. The big volume spike represented a lift of 868.12% over the trailing one-month average metric. Further, call volume landed at 134,317 contracts, beating out put volume of 117,598.
On paper, the put/call volume ratio hit 0.88, indicating that more traders transacted calls than puts. However, it’s also important to filter the white noise and focus on what the “true” smart money have been targeting. Here, we can look at Barchart’s options flow, which focuses exclusively on big block transactions likely placed by institutional or professional traders.
Notably, Barchart pointed out that for Friday, the net trade sentiment clocked in at $355,800 in favor of the bulls. Total premiums of options tied to bullish sentiment reached $1.41 million, while premiums associated with bearish sentiment options landed around $-1.05 million. Sentiment wasn’t overwhelmingly bullish but it was bullish nonetheless.
Still, CAVA stock was fading since the early afternoon hours. This price action suggests that there’s not much direct upside available in the fast-casual restaurant chain. However, there’s still a mechanism to grab a quick profit – it involves a tactic called the bull put spread.
Fast Profits from a Fast-Casual Eatery
A bull put spread involves income generation through collecting a premium for selling (writing) a put. Simultaneously, you acquire a hedge to avoid the prospect of severe financial losses by buying a put. It sounds complicated at first but here’s how such a trade breaks down:
- Acquire the hedge by buying the CAVA Aug 30 '24 116.00 at an ask of $1.70.
- Receive income by selling the CAVA Aug 30 ’24 118.00 Put at a bid of $2.15.
- The breakeven price for this trade is $117.55.
- Maximum profit is $45 per one option contract.
- Maximum loss is $155 per one option contract.
- The risk/reward ratio is 3.44 to 1 (that is, for every $1 gained for income, there is a risk of losing $3.44).
The income received is the bid of $2.15 multiplied by 100 shares, subtracted by the ask of $1.70 multiplied by 100 shares. This exercise comes out to $45. So long as CAVA stock stays at or above $118 prior to the Friday expiration date, the put writer (you) receives the max premium. In the worst-case scenario of CAVA stock tanking, the long put (hedge) caps your downside to $155.
It’s a risky wager because there’s only a 3.65% margin of safety between Friday’s closing price ($122) and the breakeven price ($117.55). However, if you believe strongly that CAVA stock can move at least sideways, it’s great way to pick up income for five days’ worth of risk exposure.
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.
