Buy Cheap Calls to Bet on More Shake Shack Upside

IV on SHAK's short-term options plunged after an early August earnings report

Aug 20, 2019 at 12:08 PM
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Shake Shack Inc (NYSE:SHAK) has turned up the heat in 2019, with the shares of the burger chain boasting a 111% year-to-date lead. More recently, the stock shot up 18.2% on Aug. 6 in the wake of the burger chain's blowout second-quarter earnings report, eventually topping out at a record high of $98.06 on Aug. 16. And while the shares have consolidated some of these gains, they're still holding near these highs, last seen at $95.89.

In the wake of SHAK's earnings report, implied volatility (IV) on the stock's options plunged. Most recently, Shake Shack's Schaeffer's Volatility Index (SVI) was perched at 37%, which registers in the 15th percentile of its annual range, meaning the equity's front-month at-the-money options have priced in lower volatility expectations just 15% of the time over the last year.

This combination of new highs and low IVs has historically been bullish for SHAK stock. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, there have been three other times the equity has been at fresh 52-week highs while its SVI was ranked in the 20th annual percentile or lower. One month out, Shake Shack was up 11.1%, on average, with 100% of the returns positive. Another move of this magnitude would put the shares above $106, based on their current price.

A repeat of history could have more short sellers jumping ship, which would likely create tailwinds for Shake Shack stock. Short interest fell 6.4% in the most recent reporting period, yet the 3.99 million shares still sold short represents 15.4% of the equity's available float, or 4.7 times the average daily pace of trading.

Meanwhile, nine of 12 analysts still maintain a "hold" or "strong sell" rating on the outperformer, while the average 12-month price target of $77.33 is a 19% discount to SHAK's present perch. A round of upgrades and/or price-target hikes could keep the wind at the equity's back.

shak stock daily price chart on aug 20


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