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Dunkin Brands Lures Bulls to the Trading Table

Speculators have a sweet tooth for DNKN's front-month calls

by 11/27/2012 2:18 PM
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Bullish options players have descended upon Dunkin Brands Group Inc (NASDAQ:DNKN - 31.61) in droves today, as roughly 13,000 calls have crossed the tape so far, which is 25 times the norm. By contrast, fewer than 300 puts have been exchanged. What's more, the equity's Schaeffer's Volatility Index (SVI) of 22% sits at an annual low, indicating that short-term options are relatively cheap at the moment -- providing an ideal premium-buying opportunity for traders expecting some near-term upside from DNKN.

The vast majority of today's call players have zeroed in on the out-of-the-money December 32.50 strike, where 12,051 contracts have changed hands at a volume-weighted average price (VWAP) of $0.17 each. More than half of these calls traded at the ask price, suggesting they were bought. Since this option currently holds open interest of just 3,048 contracts, it's likely that new optimistic bets are being initiated here. By purchasing these calls to open, traders are expecting the stock to power north of $32.67 (strike price plus VWAP) by front-month expiration on Dec. 21.

The purveyor of pastries is certainly no stranger to bullish speculation. In fact, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 3.98 for DNKN, signaling calls bought to open have nearly quadrupled puts during the last couple of weeks. This ratio ranks higher than 78% of comparable readings collected within the past year, confirming traders have been scooping up calls over puts at an accelerated clip.

As a result, DNKN's Schaeffer's put/call open interest ratio (SOIR) sits at 0.55, with calls almost doubling puts among options with a shelf life of three months or less. This ratio is docked in the 14th percentile of its annual range, indicating near-term traders have rarely been more bullishly biased toward the stock during the last 12 months.

However, it's worth noting that while short interest on DNKN depleted by roughly 16% over the most recent reporting period, these bearish bets still account for about 10% of the security's float -- or more than six days' worth of pent-up buying pressure, at the stock's average pace of trading. This implies that some of the recent buy-to-open call volume could be attributable to short sellers looking to hedge their positions.

Sentiment toward DNKN among the brokerage bunch seems to be evenly split, with eight analysts handing out "buy" or better ratings, versus eight tepid "holds." Meanwhile, the stock's average 12-month price target sits at $35.19, reflecting expected upside of about 13.6% to Monday's closing price of $30.99.

DNKN has been an outperformer on the technical front, boasting a year-over-year gain of about 24%, as well as a year-to-date advance of more than 26%. The security has also bested the broader S&P 500 Index (SPX) by close to nine percentage points during the past two months. What's more, the stock is on pace to finish November above its 10-month moving average, a feat not accomplished since July. Should the shares keep up their currently positive momentum, today's bulls could end up collecting a profit on their December call purchases.


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