Sponsored By:

Cheesecake Factory (CAKE)

Dear Fellow Options Trader,

Last week, Cheesecake Factory (CAKE) suspended its plans to buy back shares due to the crisis in global financial markets. The pop back above $10 was short-lived, however, and we've got more pressure coming down on CAKE today, as Cowen downgraded shares due to comp deceleration across the entire casual dining sector in October and an unlikely Q4 recovery.

The put/call ratio in the month of September was 2-to-1, as an average of 666 puts traded per session. Today the put/call ratio exploded to 40-to-1 as over 4,500 puts changed hands. The buying of the CAKE April 10 Puts (CFQPB) has been relentless, and even though it's not institutional buying, it does appear someone is looking for a lot more downside from CAKE.

With the Cheesecake Factory's earnings slated for Thursday, I recommend having our CAKE and making money from it too! The best way to play is to implement a bear-put spread. To do this, I recommend buying those CAKE April 10 Puts (CFQPB) and selling the CAKE April 7.50 Puts (CFQPU) against them for a net debit of $1.20. Let's also set a stop-loss at 55 cents.

A bear-put spread functions similarly to a bull-call spread, in that you are purchasing an option to hold long and selling another option against it for a credit that helps to make the long option less expensive and therefore reduce your risk. In this case, it doesn't matter how much money you spend on the long April $10s or collect on the short April $7.50s, just as long as you don't spend more than $1.20 to enter the trade.

Good luck and good trading!

Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader