Today we are adding a recent earnings season winner, though because of the weakness in the market the last two trading days, we are playing it somewhat defensively.

Cabot Profit Booster Issue: August 23, 2022

Market Overview
While the July expiration cycle for the Profit Booster portfolio went nearly exactly as planned, the August cycle was a mixed bag, with little progress made or lost. This isn’t terribly surprising as earnings season is always a bit dicey. And while our positions in ARLP and EQT were called away for full profits, and we exited JD and FTNT, we also extended our DLTR position by selling the September 165 calls for $10.55, and have now collected $25.15 of call premiums on the stock in the last three months.

Moving on …

The market’s four-week winning streak came to an end last week as the S&P 500 lost 1.2%, the Dow was mostly unchanged, and the Nasdaq fell 2.25%

This week traders will be laser focused on Fed Chairman Jerome Powell’s comments at the annual global central banking conference in Jackson Hole. It is expected Powell will give further signals as to how aggressive the Fed will be raising interest rates later this year.

Today we are adding a recent earnings season winner, though because of the weakness in the market the last two trading days, we are playing it somewhat defensively.

The Stock – Wingstop (WING)
Why the Strength
Wingstop was always a great cookie-cutter story, with a simple set of offerings (tasty wings with a bunch of seasoning choices, as well as thighs and (soon) chicken sandwiches, plus some pub fare like fries and the like) and small-form (less expensive) stores that led the company to expand rapidly and aim to be a top 10 restaurant brand over time.

But the pandemic messed things up—first in a good way, accelerating growth (the firm’s digital ordering system, which still brings in 60% of revenue, was always among the best in the industry) and then leading to a slowdown as the world turned right-side up, with elevated wing costs also contributing to some soggy sales and earnings numbers.

Now things are perking up again as focus returns to the underlying story: In Q2, not only did sales (up 13%) and earnings (up 18%) do just fine, but new store growth remained in fifth gear (restaurant count was up 14% from a year ago; new stores pay back the initial investment in less than two years) and management sees the recent dip in wing prices boosting the bottom line going forward as same-store sales begin to turn around.

But the real story is the overall outlook, with the top brass seeing room for 4,000 locations in the U.S. (vs. 1,600 today) and 3,000 overseas (vs. just 219 today; they want to have 1,200 overseas within 10 years), all while same-store sales lift at low- to mid-single digit rates. The valuation remains up there and wing costs are always a wild card, but Wingstop is likely re-entering a period of consistent growth that could last for many years to come.

Technical Analysis
WING’s sharp post-crash run petered out early on (fall of 2020), with the stock meandering for a year after that before imploding in recent months, falling from 170 to below 70 in the first four-plus months of 2022. Interestingly, the stock didn’t build much of a bottom, hovering around 80 for a few weeks, and then took off before and after earnings (six weeks up in a row), rallying back above its 200-day line. Now WING is pulling back with everything else on very light trade—we’re OK taking a stab at it here. Stop – 103

The Covered Call Trade
Buy Wingstop (WING) Stock at 120, Sell to Open September 115 Strike Calls (exp. 9/16) for $9, or a Net Price of 111 or less

Static Return: $400 per covered call (3.6%)

Breakeven: 111

Covered Call Return (if assigned): $400 per covered call (3.6%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 111 or less. (In this case 120 minus 9 = 111. Or another example is you could pay 120.5 for the stock and sell the call for 9.5, which also equals 111)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on August 30, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.