Pizza chain Papa John’s International (PZZA) has lost nearly half its value over the past year amid a slowdown in consumer spending on dining. One trader sees further weakness in the months ahead.
That’s based on the October $40 puts. With 67 days until expiration, 7,988 contracts traded compared to a prior open interest of 338, for a 24-fold rise in volume on the trade. The buyer of the puts paid $2.15 to make the bearish bet.
Papa John’s recently traded for just over $43, so shares would need to drop by $3, or about 7%, for the option to move in-the-money. The strike price of $40 is also right at the stock’s 52-week low of $39.90.
Earnings are off by 35% in the past year thanks to that pesky slowdown in consumer spending and the ongoing high costs of food prices. Revenues are off by just 3%, however, thanks to strong marketing pushes.
Action to take: Shares are still in a downtrend, even though they’re starting to look attractive at 17 times earnings. Papa John’s also pays a 4.3% dividend at current prices, but interested investors should see if the stock retests the low and trends higher before nibbling.
For traders, the October $40 puts play to the stock’s current weakness. Traders can likely nab mid-double-digit returns or better before expiration.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.
