Schaeffer's Trading Floor Blog

How Low Expectations Could Help Propel Sonic Corporation (SONC) Higher

Sonic Corporation is soaring in the wake of a quarterly earnings win

by 6/24/2014 1:56 PM
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Sonic Corporation (NASDAQ:SONC) has put in a solid performance on the charts over the past 52 weeks, with the shares up roughly 61% to trade at $23.00. What's more, the equity has found a solid layer of technical support atop its 200-day moving average -- which not only served as a foothold, but also as a springboard, during the equity's two most recent pullbacks. The stock is continuing this upward momentum today, after the company's strong quarterly earnings report prompted no fewer than four price-target hikes from the brokerage bunch -- music to the ears of option traders.

In fact, the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 1.57 ranks in the 73rd percentile of its annual range. Simply stated, calls have bought to open over puts at a faster-than-usual clip in recent months.

Even more telling of this call-skewed bias is SONC's Schaeffer's put/call open interest ratio (SOIR) of 0.24. Not only does this show that call open interest outweighs put open interest by a more than 4-to-1 margin in the front three-months' series of options, but it ranks lower than all other readings taken in the past year. Simply stated, short-term speculators are more call-heavy now toward SONC than at any other time during the past year.

Looking elsewhere reveals that not everyone is as sanguine toward SONC as option players. Although short interest declined 9.8% over the past two reporting periods, it still accounts for a healthy 9.5% of the stock's available float. Given the equity's withstanding technical prowess, a portion of the recent call buying may have been at the hands of short sellers hedging against any additional upside.

Nonetheless, it would take more than nine sessions to cover SONC's remaining shorted shares, at the stock's average daily pace of trading. From a contrarian perspective, should Sonic Corporation (NASDAQ:SONC) continue to gain ground on the charts, an additional round of short covering could help propel the security even higher.

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