One of the more difficult narratives to decipher, Bloomin’ Brands (BLMN) appears subject to pressures impacting the consumer discretionary ecosystem. As a restaurant holding company, Bloomin’ appears vulnerable to the trade-down effect. In addition, technical indicators suggest BLMN stock is a sell. On the other hand, it just pinged as one of the possibly bullish indicators in the derivatives market.
So, will the real BLMN stock please stand up? Here’s the analysis investors need to make a more informed decision.
First, it’s perfectly normal to be skeptical about Bloomin’. Fundamentally, consumer sentiment – while rising from its low point in 2022 – remains below levels seen in the years leading up to the COVID-19 pandemic. Understandably, factors such as stubbornly high inflation have incentivized consumers to close their wallets until absolutely necessary.
For Bloomin’, the company does offer a great experience. However, it’s not great enough to be worth imperiling one’s financial status, especially when companies are also issuing mass layoffs. Not surprisingly, the Barchart Technical Opinion indicator pegged BLMN stock a 72% strong sell, issuing the strongest short-term outlook warning.
Obviously, that’s not a very encouraging factor. However, BLMN stock isn’t a completely speculative proposition. Thanks to the revenge travel phenomenon, more people are out and about on vacation. Since by logical deduction they won’t be cooking at home, Bloomin’ offers an interesting contrarian investment.
And then, there’s the matter of the derivatives market activity.
BLMN Stock Options Seemingly Point to a Positive Trajectory
Following the close of the Oct. 23 session, BLMN stock represented one of the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 7,397 contracts against an open interest reading of 13,867 contracts. This spike represented a 962.79% difference between the Monday session volume and the trailing one-month average metric.
Aside from the sudden surge in demand for BLMN stock options, the transactional breakdown raised some curious eyebrows. Specifically, call volume clocked in at 7,185 contracts versus put volume of only 212. This pairing yielded a put/call volume ratio of 0.03, which on paper dramatically favors the bulls.
To be sure, one must take caution against immediately assuming a face-value interpretation of the aforementioned ratio. That’s because for every bought option, someone else is taking the opposite side of the wager. If it turns out that a few institutional traders are writing (selling) the aforementioned calls, it may mean that these stalwarts don’t anticipate BLMN stock hitting the underlying strike price.
Otherwise, under exercise of the contract, call option writers have the obligation (but not the right) to fulfill the terms; that is, selling the underlying security at the listed strike price. However, checking Fintel’s screener for options flow – which filters exclusively for big block trades – it appears institutional traders are net bullish on BLMN calls, specifically the Nov 17 ’23 25.00 Call.
So, should investors buy BLMN stock? To better understand the implications of the inquiry, it’s helpful to bring in context. From option expiration dates in August 2022 through September 2023, the maximum and minimum strike price range narrowed considerably. This dynamic may be due to options traders believing in a more predictable – and thus narrower – spectrum of outlooks.
However, from September onward, the strike price range has widened again. For instance, for options expiring in January next year, the highest strike price clocks in at $30 while the lowest lands at $25. That’s a gap of 20%. In contrast, the gap in September was only 10%.
Therefore, while some institutional traders are bullish on BLMN stock, other traders are accounting for a wider range of possibilities.
Higher Risk for Higher Reward
In the trailing one-month period, BLMN stock lost more than 3% in the open market. It’s possible, then, to state that shares have been somewhat de-risked. However, has it been de-risked enough to justify a contrarian position in BLMN stock?
I’m not so confident. Why? Because the widening of the strike price range in the derivatives market occurred in October. Thus, the question is, what changed in October? Arguably, the biggest factor is the September jobs report. While the print came in hotter than expected, this dynamic also implies that the Federal Reserve will raise interest rates to combat inflation.
I’d argue that higher costs and prices is not what the restaurant industry needs right now. Therefore, I’d need to see more de-risking in BLMN stock before jumping in with the institutional bulls.
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