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Bears See Cheesecake Factory Puts as Sweet Treats

CAKE tempts bearish options players with poor price action

by 10/11/2011 11:15:03 AM
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The Cheesecake Factory (CAKE - 26.16) saw a flood of bearish option activity yesterday, as nearly 9,100 puts crossed the tape, reflecting at least 12 times the equity's average daily put volume. Elsewhere, only 1,756 calls were exchanged.

Looking into CAKE's front-month series of options, more than 3,400 puts changed hands at the out-of-the-money October 23 strike on Monday -- more than half of them at the ask price, suggesting they were bought. Open interest on this put jumped by 3,055 contracts overnight, suggesting that the majority of the day's volume consisted of newly opened positions. This strike now holds peak front-month put open interest of 8,055 contracts in residence. Meanwhile, call players find themselves being lured in by the out-of-the-money October 28 strike, which is home to peak call open interest of 6,624 contracts.

Exploring CAKE's sentiment background further, the Schaeffer's put/call open interest ratio (SOIR) stands at 1.37, indicating that puts are outnumbering calls among options set to expire within three months. This ratio ranks in the 92nd percentile of its annual range, which means that short-term options players have been more bearishly slanted toward the stock only 8% of the time.

What's more, CAKE's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio rests at 1.19, confirming that puts bought to open have outnumbered calls during the past two weeks. This ratio ranks in the 52nd annual percentile, conveying that traders are purchasing bearish options over bullish at a slightly faster-than-usual pace.

Short interest on CAKE has surged by 17.7% over the past two reporting periods. These bearish bets represent 18.95% of the equity's float. At the stock's average daily trading volume, it would take more than nine days to cover these shorted shares.

While the majority of analysts following CAKE appear to be lukewarm toward the restaurant and bakery behemoth, there are several who seem to feel rather optimistic. According to Zacks, the stock currently boasts nine "buy" or better ratings, compared to 16 "holds" and not a single "sell."

Digging into CAKE's technical performance, the stock has lost more than 15% of its value year-to-date, and has underperformed the broader S&P 500 Index (SPX) by just over 12% during the past 60 sessions. A look at the charts shows that the equity has been trading below its formerly supportive 20-week and 40-week moving averages since the end of July, and it is currently pinned beneath resistance around the $28 level.

Weekly Chart of CAKE since January 2010 With 20-Week and 40-Week Moving Averages

With CAKE's fiscal third-quarter earnings due to be released next week, it's worth noting that the stock bested the consensus bottom-line estimate in three out of the past four quarters, and matched expectations in the remaining quarter. Still, unless the equity manages to regain some of the positive price action it saw earlier this year, put players may want to hold on to their bearish desserts.

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