The month of September was flat-out ugly for the market as the S&P 500 fell 9.3%, its worst monthly drop since March 2020 (Covid). And the numbers were similarly negative this last week as the S&P 500 and Dow lost 3%, and the Nasdaq fell another 2.7%.

Cabot Profit Booster Issue: October 4, 2022

Market Overview
The month of September was flat-out ugly for the market as the S&P 500 fell 9.3%, its worst monthly drop since March 2020 (Covid). And the numbers were similarly negative this last week as the S&P 500 and Dow lost 3%, and the Nasdaq fell another 2.7%.

The good news, maybe, is the month and quarter are over, and maybe, just maybe, the calendar flipping to October will stem some of the market’s recent losses. In fact, via @Ryandetrick on Twitter: “S&P 500 down 24.8% YTD at the end of September. Since WWII, only 1974 and 2002 saw worse starts to a year. Both years saw the S&P 500 gain 7.9% in Q4.”

And right on cue, the S&P 500 rallied 2.6% on Monday. Let’s see if the bull can string together a couple days of positive action.

The Stock – Wingstop (WING)
Why the Strength
As we wrote about a few weeks ago, Wingstop has always had a big idea, to be a top 10 global restaurant brand, and it’s been executing on its cookie-cutter plan in fine fashion for many years—at the end of June, the store count of 1,791 was up 14% from a year ago, and it thinks it can have 4,000 domestic (1,588 now) and 3,000 international (203 now) locations when all is said and done.

Those locations are increasingly profitable, too: sales average $1.6 million per domestic restaurant, up from $1.1 million in 2015 and on their way to $2 million down the road as same-store sales slowly expand; today, all of this leads to a payback of initial investment in well under two years, a figure that should improve going forward. Interestingly, part of the story here is deflation, which you don’t hear much about these days—rising wing prices (up 72%) last year hurt margins, but now wing prices are down to pre-pandemic levels.

Combined with an expected re-acceleration in same-store sales and a broader menu (Wingstop is moving into chicken sandwiches), Wall Street is thinking the underlying growth story is back on track after some ups and downs during the pandemic: While growth has been modest the past couple of quarters, analysts see the top line lifting 36% in Q3 and 24% for 2022 as a whole, while earnings estimates continue to trickle higher (mid to upper teens growth this year and next), with years worth of expansion beyond that. We think Wingstop can be a small-cap leader of the next sustained market upmove. Earnings are due October 26.

Technical Analysis
WING fell 63% from top to bottom in this bear market, and at its May low of 68, hadn’t made any net progress for three and a half years—both of which surely scared and wore out the weak hands. And the stock has been acting very well since then, with not just a big post-earnings move, but a higher high and higher low (and support near the 50-day line) in recent weeks. Stop — 110 (again, this week I am going to lower the stop on this trade a bit, as we are receiving a large premium via our call sale)

The Covered Call Trade
Buy Wingstop (WING) Stock at 130, Sell to Open November 130 Strike Calls (exp.11/18) for $10, or a Net Price of 120 or less

Static Return: $1000 per covered call (8.33%)

Breakeven: 120

Covered Call Return (if assigned): $1000 per covered call (8.33%)

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 120 or less. (In this case 130 minus 10 = 120. Or another example is you could pay 129.5 for the stock and sell the call for 9.50, which also equals 120)

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 October 11, 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.