Let’s get this out of the way: I’m supposed to talk about unusual options activity but wouldn’t you rather hear about profitable activity? Hearkening back to my major wins, I don’t remember giving one care in the world about the unusualness of the transactions. Indeed, the only thing I focused on was the actualized capital gains.
So, with that opener out of the way, let’s move onto a development that should be groundbreaking. The world’s largest owner and operator of bowling entertainment centers, Bowlero (BOWL), is also the most heavily shorted security in the U.S. market right now. According to Fintel, the short interest of BOWL stock stands at 90.93% of its float. That’s a huge gap from second place, occupied by investment advisory firm B. Riley Financial (RILY).
And even this simple comparison tells you the wide discrepancy between BOWL stock and its “true” forward value. Based on Barchart’s Technical Opinion indicator, B. Riley has good reason to see so much short interest in its stock. It rates as a 100% sell. On the flipside, BOWL stock clocks in as an 88% strong buy.
Glaringly as well, B. Riley sees no coverage from Wall Street analysts. BOWL stock? Not only is the expert consensus positive, it lands as a unanimous buy among nine individual ratings. Further, analysts also see a mean price target of $19.61, with the high side clocking in at $25.
Unsurprisingly, the market performance compels. In the business week ending Feb. 9, BOWL stock closed at $14.99, having gained over 22% of equity value. However, it arguably remains an early inning opportunity. In the past 52 weeks, shares only gained about 10.5%. With the aforementioned short interest shooting up to over 90%, any panic among the bears could cause a positive feedback loop.
In turn, bullish speculators have several options – no pun intended – to consider.
BOWL Stock May Not be Unusual But It’s the One to Pay Attention To
If you peruse Barchart’s screener for top unusual stock options volume, you won’t find BOWL stock there. And even if you extend the list out to its maximum 500 securities, you still won’t find Bowlero. Last Friday, BOWL gained a bit over 1%. It’s a positive showing but nothing remarkable. So, why bother talking about it?
Again, it’s about the extreme short interest. One of the key drivers of this metric is that it tips the hands of the bears. Consider the equivalent action in the derivatives market, the sold call. If an option trader decides to write uncovered (naked) calls – meaning that the trader underwrites the risk that the target security won’t rise to the listed strike price before expiration but without owning the stock itself – that could create a panic.
However, as far as I’m aware, it’s impossible to determine 100% whether a sold call is covered or naked using publicly available resources. But that’s not the case with short interest. When short interest as a percentage of float rises, it’s because traders are directly shorting the security. So, if the stock moves against the pessimists, it can easily spark a positive feedback loop that could benefit the contrarian bulls.
So, those in the know have likely positioned themselves to advantage the coming upswing. Again, I’m sounding like a broken record but the short interest stands at over 90%. That’s a lot of unwinding for the bears to accomplish. If they do, it’s the first ones out who leave the trade who will incur the least amount of damage. So, it’s possible to see a “negative” competition arise among the bears.
To exploit this setup, then, the most bullish speculators may want to consider far out the money (OTM) calls, such as the May 17 $17.50 calls. However, those who want to get the best “administrative” deal should focus on the May 17 $15 calls. Why that contract? Because the bid-ask spread as represented by the midpoint price sits at only 2.35%.
Compare that to the spread of the March 15 $12.50 call, which lands at 3.57%. Generally, near-expiry options that are in the money (ITM) feature narrower spreads due to higher participation (volume). Thus, the fact that the further-expiry OTM call had the narrower spread suggests that the smart money is waking up to the speculative opportunity in BOWL stock.
The Fundamentals Work Too!
Another option that you could pursue is no option at all. You could decide to buy BOWL stock in the open market. The justification for this trade focuses on the compelling fundamentals. You read that right – Bowlero isn’t just about scalping a quick profit.
With the U.S. economy running on all cylinders – evidenced by stronger-than-expected fourth-quarter GDP growth figures and another robust print in the monthly jobs report – more people have more discretionary income. And that should translate to upside in BOWL stock.
For one thing, bowling isn’t an exclusive activity reserved for the wealthy like polo or yachting. Instead, anybody with an average income can access the activity. Also, bowling represents one of the most popular participatory sports in the U.S. With society for the most part becoming fully normalized, bowling demand could increase.
That’s what the bear army apparently doesn’t see. Then again, the narrative makes for a compelling contrarian opportunity.
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On the date of publication, Josh Enomoto had a position in: BOWL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.