The college football season got underway last night with the South Florida Bulls routing the 25th-ranked Boise State Broncos, 34-7. While there’s another top 25 team in action tonight — number 12 Illinois — the majority of top 25 teams play on Saturday. The following Thursday, NFL football begins with the Cowboys playing the Eagles in Philadelphia. Can’t wait.
Enough about football; I’m here to discuss unusual options activity. In Thursday’s trading, there were 796 calls and 533 puts, resulting in a put/call ratio of 0.67, a slightly bullish indicator. Among the 533 puts were two Wendy’s (WEN) puts expiring in 50 days on Oct. 17.
As you can see above, both of the puts are OTM (out-of-the-money), with the $9 strike possessing the highest Vol/OI (volume-to-open-interest) of any unusually active option yesterday at 150.09, almost double the put in second place.
Not a lot has gone right for the fast food chain in recent years. Its stock is down 36% year-to-date and 52% over the past five years. Its shares are well down from the 20-year high of $29.31 set on June 1, 2021.
Wendy’s wouldn’t be the first stock I would think to invest in at the moment. That said, the two unusually active puts suggest someone could be looking to protect their downside.
With that in mind, here are three potential trading strategies to implement based on Wendy’s two puts.
Have an excellent weekend.
Starting with the most obvious, you have three possibilities: buying a long put for downside protection, profiting from further correction in the share price, or selling a short put for premium income.
In terms of downside protection, the $10 strike is the better play with a profit probability of 25.80%. The share price must fall below $9.60 (8.57%) to make a profit from the trade. The $9 strike has to fall 15.71% over the next 50 days. The likelihood of that happening is 13.01%, so it’s not likely.
Whether you own the stock and are looking to protect on the downside or to profit from a further correction, the $10 strike is the way to go.
Now, if you believe that the stock has fallen as far as it can go and want to generate some income by selling the put, it’s tempting to sell the $10 strike. However, the $9 strike is the better bet to avoid having to buy 100 shares at $10 at expiration, above where they might be trading.
