Despite significant questions about the viability of the box office, Cinemark (CNK) continues to astound onlookers this year. Since the beginning of January, CNK stock has almost doubled in value. Driving the narrative have been stronger-than-expected financial performances. However, it’s also possible that the enthusiasm — at least in the near term — may be running out of steam.
At first glance, it doesn’t seem that way. Aside from nearly doubling on a year-to-date basis, CNK stock has returned about 51% of value for shareholders in the trailing six months. However, the past 30 days have been far less impressive, with the security only gaining a bit over 2%. On the charts, there may be a head-and-shoulders pattern developing, which if true would have bearish implications.
For the time being, investors of CNK stock are banking on the sustained implications of the company’s second-quarter earnings report. In early August, the company reported earnings per share of 32 cents on revenue of $734.2 million. Both stats exceeded their respective analyst targets by very healthy margins. If Cinemark can deliver the goods again in Q3 (with results likely coming in early November), it could be off to the races.
However, there are signs of concern. As I mentioned earlier, industry experts have raised alarm about the fading box office. Also, advancing technologies and economies of scale mean that consumers enjoy robust at-home entertainment options. Specifically, big-screen television sets have never been cheaper, one of the few retail categories that have witnessed price declines in the post-pandemic paradigm.
Ultimately, it’s difficult to argue against performance. CNK stock doubled for a reason. Nevertheless, there could be an opportunity for aggressive, near-term bearish speculators.
Unusual Options Activity Adds a Twist to the CNK Stock Storyline
At first glance, Monday’s snapshot for unusual stock options volume appears to smile at the pessimists. When the session closed, total volume for CNK stock options reached 6,646 contracts against an open interest reading of 139,440 contracts. This figure represented a 174.17% lift from the trailing-month average volume, indicating significant engagement.
What’s more, call volume only reached 498 contracts while put volume soared to 6,148. This pairing resulted in a lopsided put/call volume ratio of 12.35. Considering that puts provide holders with the right (but not the obligation) to sell the underlying security, the high concentration of puts would appear bearish for CNK stock.
However, for every option buyer, there is a seller. Perusing options flow data — which filters exclusively for big block transactions likely placed by institutions — net trade sentiment (based on premiums tied to all transactions) on Monday reached $132,300, favoring the bulls. Premiums associated with just bullish transactions hit $171,400, while premiums tied to bearish trades was only $-39,100.
Here’s where circumstances get interesting. All the bullish trades for the Sept. 30 session were for sold puts, with most of the activity focused on the Jan. 17, 2025 expiration date. Within this options chain, most of the sold puts featured a strike price of $30.
At face value, options flow suggests that CNK stock will generally rise gradually from here. That seems reasonable. However, the path to $30 by January could be choppier than some investors anticipate.
It wouldn’t be out of the question for Cinemark to incur a noticeable dip prior to the company’s Q3 earnings report. While the box office may appear exciting again, there are many skeptics. Also, since the booming popularity of streaming services, the big screen has lost much of its appeal.
That’s not to say that CNK stock is projected to hit a prolonged downturn. However, I’m concerned about the implications of the aforementioned bearish head-and-shoulders pattern.
A Bear Call Spread for the Daring Speculator
For those who wish to extract some quick profits on the downside, a vertical options strategy called the bear call spread may be enticing. This involves generating income from a sold call and capping off the liability posed (upon assignment) with a bought call at a higher strike price. Specifically, traders may consider the below transaction for the options chain expiring Oct. 18, 2024:
- Sell the $28 call at a bid of 75 cents per contract (or $75 when applying the options multiplier).
- Buy the $30 call at an ask of 25 cents per contract.
- The net income received comes out to 50 cents (or $50), which is also the max reward possible.
- The maximum loss is $1.50.
- Breakeven clocks in at $28.50.
- The risk-reward ratio is 3 to 1 (for every $1 of income received, $3 is at risk).
Barchart notes that the probability of generating at least some profit from this trade comes out to 61.6%. That’s reasonable given the 3-to-1 risk-reward ratio. In addition, CNK stock closed at $27.84 on Monday, leaving about a 2.4% “safety” margin to breakeven. In other words, Cinemark can still gain 2.4% without this position being liable for assignment (assuming intrinsic value at expiration).
Granted, CNK stock can move wildly in either direction — we’ve seen over the past few years. Still, if you’re confident about the near-term downside argument, the bear call spread could be a relatively sensible, risk-controlled mechanism to temporarily short the cineplex operator.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
