On Thursday, DRI – whose brands include Olive Garden, Longhorn Steakhouse and The Capital Grille – reported earnings that blew out expectations on both revenue and profits. The company also announced that its dividend would more than double along with a $500 million share repurchase program. The news was warmly greeted by the Street, which showered the dine-in chain conglomerate with a slew of target price increases that ranged as high as $165 (the stock closed Friday at $149). The shares gained more than 11% in the two days following the earnings news, hitting yet another all-time high on Friday.
To say DRI is in rally mode would be a gross understatement. Since bottoming last April, the stock has rocketed 245% higher. Already this year, DRI has gained 25%. The rally has proceeded largely along DRI’s 20-day moving average, with the 50-day moving average lending support on pullbacks. With strong fundamentals in place and a recent uptick in same-store sales, there’s ample reason to believe the rally should continue as customers return to DRI’s varied dining rooms.
If you agree that DRI’s rally has legs, consider the following trade that relies on the stock remaining above $145 through expiration in eight weeks.
Buy to Open DRI 21May21 140 Put (DRI210521P140)
Sell to Open DRI 21May21 145 Put (DRI210521P145) for a credit of $1.90 (selling a vertical)
This credit is $0.05 less than the mid-point of the option spread when DRI was trading just below $149. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will be only $1.30 per spread. Each spread would then yield $188.70. This trade reduces your buying power by $500 and makes your investment $311.30 ($500 – $188.70). If DRI closes above $145 on May 21, both options will expire worthless and your return on the spread would be 61% ($188.70 / $311.30).
As with all investments, you should only make option trades with money that you can truly afford to lose.