Cheesecake Factory feeds bears

Downside option positions more than tripled in value after Cheesecake Factory posted weak quarterly results this morning.

On July 21, Investitute’s proprietary programs identified the purchase of 2,100 August $50 puts for $1.70 to $1.80 with shares at $49.91. This was clearly fresh buying, as open interest in the strike was only 164 contracts before the activity appeared.

Today those puts traded for $6, representing an average gain of nearly 250 percent. The stock fell 11.3 percent in the same time frame, showing how options can far outperform their underlying shares.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

CAKE dropped 6.24 percent to $44.19 today. The restaurant chain missed revenue projections and cut guidance for the full year before the market opened.