Putting on the squeeze?

●Darden Restaurants (DRI) jumps on earnings

●More put options activity than usual yesterday

One stock, two days, two very different results. And a question.

Darden Restaurants (DRI), operators of the Olive Garden, Capital Grille, and Longhorn Steakhouse mega-chains, among others, dropped more than 4% to $98.89 on Monday, capping a -13% slide from the November 28 close. It was the stock’s lowest price since June, and occurred conspicuously before yesterday’s earnings.

Those numbers were mixed, but solid—DRI topped earnings estimates by a penny, missed revenues slightly, and gave fairly upbeat forward guidance.1

Darden Restaurants (DRI), 9/18/18–12/18/18. Blurb: Darden Restaurants (DRI) price chart. Earnings rally after five-month low.

Source: Power E*TRADE

The stock’s initial reaction was far from mixed, though—DRI shares jumped more than 6% to $104.95 before settling in between $103–$104 (+4–5%) mid-morning.

At the same time, options traders got busy in DRI. Scooping up calls, you say? No, they actually seemed to be trading more puts than usual. The following LiveAction scans shows DRI put volume (top) and the DRI put/call ratio (bottom) were both a little more than two times their average levels early in the trading session.

LiveAction scans: Unusual put volume and highest put/call ratio, 12/18/18.

Source: Power E*TRADE

Here’s the question: What did the options activity mean?

One way to look at the put options activity is that it represented bearish bet by some traders—perhaps a contrarian reaction to the big post-earnings bounce, and an expectation the stock will eventually revert to the downside and push below Monday’s low.

Here’s an alternate take: Many DRI investors may have been buying puts as protection as their stock slumped in recent weeks, and especially as earnings approached. The stock’s big jump yesterday may have convinced some of those traders (and forced others) to get out of those positions. Of course, other traders would be on the other side of these trades—that is, buying those DRI puts—but since the rally was deflating put prices across the board (January $105 put options were trading around $4.35 yesterday at noon, less than half of where they closed on Monday), traders were getting a relatively good bargain.

The question of what options activity “means” on any given day is almost always more difficult to fathom than it first appears. Other pieces of the market puzzle need to be clicked into place before the bigger picture emerges.

Market mover update: After losing more than 2% on Monday and closing near the bottom of its range, the S&P 500 (SPX) rebounded as much a 1.1% intraday yesterday (see "Intraday momentum points in surprising direction").

January WTI crude oil futures (CLF9) followed up on Monday’s breakdown with a -5% intraday drop yesterday, falling below $47/barrel.

Today’s numbers (all times ET): Current Account (8:30 a.m.), Existing Home Sales (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), FOMC meeting announcement (2 p.m.).

Today’s earnings include: General Mills (GIS), Paychex (PAYX).


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1 Investor’s Business Daily. Olive Garden Parent Boosts Profit Outlook, But Q2 Comps Miss. 12/18/18.