Restaurant Stock Could be a Good Call for Contrarians

The stock sports cheap options at the moment, too

Nov 19, 2020 at 12:26 PM
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Restaurant chain Texas Roadhouse Inc (NASDAQ:TXRH) has enjoyed an impressive rally from its mid-March lows, despite the coronavirus pandemic’s weight on the sector. The stock pulled back sharply from its all-time high at the beginning of the week, but its 40-day moving average stepped up as support. This moving average is important; it connects a trendline from those March lows, and has been a key area for both bull and bearish trends. That being said, now looks like an opportune time to bet on TXRH’s next leg higher.

TXRH Chart Nov 19

It’s certainly a good time for contrarians to weigh in, considering the equity’s Schaeffer’s put/call open interest ratio (SOIR) of 1.88, which sits in the 97th percentile of its annual range. This means short-term options traders have rarely been more put-biased in the past 12 months. Furthermore, TXRH’s 10-day put/call volume ratio of 2.87 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits higher than 84% of readings from the past year.

Although shorts are in covering mode, short interest still makes up 7.1% of the security’s available float. It would take over five days to buy back those bearish bets, at TXRH’s average pace of trading. Meanwhile, a round of analyst upgrades could act as a tailwind as well. Of the 18 brokerages in coverage, 15 sport a lukewarm “hold” rating on the stock.

The good news for options traders is that the stock’s Schaeffer’s Volatility Index (SVI) of 49% sits higher than just 15% of all other annual readings, meaning options traders are pricing in relatively low volatility expectations at the moment. Plus, Texas Roadhouse stock’s Schaeffer’s Volatility Scorecard (SVS) ranks at a relatively high 73 out of 100, meaning the equity has tended to exceed these expectations.

Subscribers to Schaeffer's Weekend Trader options recommendation service received this TXRH commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.


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