Expectations Rise as El Pollo Loco Holdings Inc (LOCO) Prepares to Join SP600

El Pollo Loco Holdings Inc (LOCO) will join the SP600 early next week

Sep 9, 2016 at 11:56 AM
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El Pollo Loco Holdings Inc (NASDAQ:LOCO) is 5.8% higher today at $14.31 -- with intraday stock volume in the 99th annual percentile -- while its options pits have caught fire. Sparking the accelerated interest is news LOCO will join the S&P SmallCap 600 Index (SP600) at next Monday's close, replacing American Science & Engineering, Inc. (NASDAQ:ASEI).

Today's upside gap has the restaurant stock on pace to finish at its high level since late April. LOCO has been blazing a path sharply higher in recent months, up roughly 49% since bottoming at $9.58 in mid-May. What's more, the shares have also outperformed the broader market, standing on a year-to-date gain of more than 13%.

As alluded to, LOCO options are hot today -- especially on the call side of the aisle, where contracts are running at four times the expected intraday clip (though volume is still relatively meager, from an absolute perspective). This represents quite a reversal from the prevailing trend toward puts. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), LOCO has racked up a 50-day put/call volume ratio of  2.38 -- an annual high.

While some of those puts may have been purchased by shareholders seeking a hedge, there's no questioning the motives of short sellers. These bears have been very active of late, with short interest growing nearly 14% in the most recent reporting period. In fact, the 3.2 million shares sold short is the highest level LOCO's seen since mid-December, and would take more than a week to cover, at the stock's typical volume.

Briefly returning to the options pits before concluding, it's worth noting that short-term contracts can currently be purchased at a relative discount, no matter the strategy. For one, El Pollo Loco Holdings Inc's (NASDAQ:LOCO) Schaeffer's Volatility Index (SVI) of 39% rests in the low 3rd percentile of its annual range. For another, the stock's 30-day at-the-money implied volatility sits at 41%, lower than 93% of all comparable readings from the past year.

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