Shake Shack Options Bulls Tripled Their Money in Four Weeks

A round of post-earnings bullish brokerage notes created tailwinds for SHAK

by Emma Duncan

Published on May 10, 2018 at 3:19 PM

Subscribers to Schaeffer's Weekend Trader Alert service just scored a 208% profit with the Shake Shack (NYSE:SHAK) June 40 call. We're going to take a look back to see why we were initially bullish on SHAK, and how the options trade unfolded.

At the time of our initial call recommendation on Sunday, April 8, we noted that Shake Shack stock had recently bounced from the $40 mark -- a previous area of resistance -- to rally back above the $42 level, which was two times its initial public offering (IPO) price. SHAK was also up nearly 31% over the previous 12 months, but remained surrounded by bearish sentiment. With the stock trading just above such a notable technical level, it looked like an excellent bullish target for contrarian traders.

One of the most noticeable things about Shake Shack was the sharp decline in short interest in recent months. However, more than one-third of the equity's float was still held by short sellers at that time, and would take them more than two weeks to buy back these shares, based on average daily volumes. In short, there was a ton of buying power on the sideline.

Analysts seemed overly bearish, too. Of the nine brokerage firms tracking SHAK, six had "hold" or "sell" ratings in place, and the stock was also trading above its average 12-month price target of $42.10. There was clear potential for upgrades and/or price-target hikes to come through and provide tailwinds, as well.

In our April 8 alert, we recommended that subscribers buy the June 40 call. On April 26, the equity gapped above recent congestion in the $44 region on a possible halo-lift from fellow restaurant stock Chipotle Mexican Grill (CMG). These bullish flames were stoked by a big May 3 earnings win -- which sparked a round of bullish brokerage notes. Four weeks after our entry date on Friday, May 4, SHAK gapped 24% higher that morning to touch a then two-year peak of $58.98, which allowed us to close the trade that day and lock in a 208% profit.

Daily Chart of SHAK with Entry Exit Dates

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