Call Buyers Bet On Beaten Down Papa John's Stock

Short interest has more than doubled on PZZA in the past year

by Josh Selway

Published on Jan 17, 2018 at 2:21 PM

Papa John's International, Inc. (NASDAQ:PZZA) has underperformed on the charts in recent months, down 30.3% over the past year. This dismal return comes despite strong showings from a number of sector peers from our Restaurant & Bars sub-sector, including Dow component McDonald's (MCD). Out of this group of roughly two-dozen, PZZA is one of just six that's trading below its 80-day moving average, according to data from Schaeffer's Senior Quantitative Analyst Rocky White, as fundamental difficulties like the departure of founder John Schnatter have pressured the shares.

Many traders have been betting on more downside, too. For example, White's data also shows short interest on Papa John's has more than doubled over the past year, part of what's actually been a multi-year uptrend in these bearish bets. In the last reporting period alone, short interest jumped another 28%, and now accounts for almost 22% of the float.

Options data also paints a bearish picture, according to the security's 10-day put/call volume ratio from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This reading comes in at 4.87, and ranks in the 88th annual percentile. So not only has put buying nearly outpaced call buying by 5-to-1, this heavy of a call-skew is very unusual compared to historical norms.

Today, however, call buying is stealing the show. Trade-Alert is highlighting one trade where someone seemingly closed 5,000 April 60 calls and in turn bought 5,000 July 62.50 call options. If this is the case, this trader is bullish, betting on Papa John's stock to rebound higher in the months ahead.

The action today has call volume at more than double the previous 52-week high, and comes at an opportune time. That is, PZZA has a 30-day implied volatility skew of 20.3%, which ranks in the top percentile of its 52-week range. In other words, volatility premium for calls has rarely been lower when compared to put options.

At last check, the equity was trading 2.5% lower at $58.92, following news the company's CFO has left for Jack in the Box (JACK). The shares earlier found support at the 50-day moving average, however, a trendline they recently reclaimed.

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