Short Player Gobbles Up CAKE Options

06/17/2011 8:00 am EST

Focus: OPTIONS

Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

This recently constructed put spread on Cheesecake Factory (CAKE) will profit if shares of the restaurant chain decline considerably in the months ahead, taking out strong support in the process.

Is Cheesecake Factory (CAKE) on the verge of a breakdown? At least one options trader seems to think so. Earlier today, the casual restaurant chain was the subject of a bearishly biased debit spread, which will attain its maximum profitability if CAKE sheds about 17% over the next four months.

Specifically, the trader constructed a long put spread by purchasing 1,500 October 30 puts and simultaneously selling 1,500 October 25 puts. The volume was easily outstripping open interest at both strikes, so it's safe to assume these are all freshly opened positions.

By initiating this pessimistically slanted strategy, the speculator is betting on CAKE to decline from its current perch north of $30 and finish at or just below $25 upon October expiration.

However, support from CAKE's 40-week moving average could create trouble for this bearish option bettor. This trend line has served as a reliable technical floor for the shares since February, containing all of CAKE's pullbacks during this time frame. Currently, this moving average is located just below the round-number $30 region.

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By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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