Option Bears Get Burned as Domino's Pizza, Inc. (DPZ) Serves Up a New High

Domino's Pizza, Inc. (DPZ) tapped a new record high after beating earnings expectations

Oct 18, 2016 at 10:39 AM
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Domino's Pizza, Inc. (NYSE:DPZ) reported its third-quarter results ahead of the open, including earnings and revenue that easily topped analysts' expectations. Also assisted by a price-target hike to $152 at Nomura, the shares are 5.4% higher at $160.22 -- and just off a brand new all-time high of $161.41. The news may have some recent option bears kicking rocks this morning, and the action is already heating up in DPZ's options pits.

Jumping right in, DPZ calls are trading at roughly 17 times the usual intraday pace, with 3,500 contracts on the tape so far -- putting call and total options volume on track for annual highs. Most active are the October 160 and 165 calls. It's possible some bullish speculators may be purchasing new positions, betting on the stock to extend its rally through week's end, when the front-month series expires

Meanwhile, the recent trend in DPZ's options pits has been put buying. In fact, options traders have purchased more than five of the stock's puts for each call over the past 10 sessions on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The resulting put/call volume ratio of 5.12 sits just 5 percentage points from an annual high. If these are "vanilla" bears, they're likely getting burned on today's bull gap.

But it's also possible these put buyers aren't truly bears. With DPZ trending higher on the charts this year, shareholders may have picked up protective puts to hedge their long positions against downside risk. Adding credence to this theory, peak open interest currently resides at DPZ's deep out-of-the-money December 140 and 130 puts, which are more likely to be protective rather than speculative in nature.

Outside of the options pits, some bears got out in the nick of time. Short interest on DPZ fell by nearly 15% during the most recent reporting period, and now represents just 5.2% of the equity's total float. However, analysts have been lukewarm -- at best -- toward the stock. Of 13 brokerage firms tracking DPZ, only two rate it better than a "hold." Plus, the average 12-month price target of $153.25 sits at a discount to current trading levels. This leaves the door wide open for future upgrades and price-target hikes -- something that's already starting to happen, based on the aforementioned Nomura note.

Overall, DPZ has had a strong year from a technical perspective, adding over 44% in 2016. Leading up to earnings, the shares had found a foothold above the round $150 level, which also corresponds with the rising 50-day moving average. Of course, given today's upside action, Domino's Pizza, Inc. (NYSE:DPZ) looks to be leaving both levels in the dust.

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