Fundamentally, bowling center operator Bowlero (NYSE:BOWL) theoretically enjoys a long-term bullish narrative. With bowling representing one of the most popular sports in the U.S., Bowlero should attract patient investors. However, that’s not the focus of this story, which centers on extreme speculation. As the bears threw everything at the company, the bulls woke up. Subsequently, a short squeeze could be on, making me bullish on BOWL stock call options in the near term. I also hold a position.
Watch BOWL Stock Because the Smart Money Senses Something
Before placing any wagers down in the options market, it’s important to consult TipRanks’ screener for unusual options activity. Basically, the derivatives market represents the playground for sophisticated traders. And aberrant fluctuations in this relatively rarefied arena suggest large-scale movements made by the smart money. To be sure, betting with the smart money doesn’t guarantee anything, but you’ll at least want to know what they might be thinking.
What’s useful about TipRanks’ screener over competing platforms is that it provides a breakdown of the sentiment associated with the unusual activity. In February thus far, transactions with bullish sentiment have conspicuously outnumbered those with bearishly aligned sentiment.
Of course, the market, being a repository of collective human emotions, ebbs and flows. However, during previous runs of bullish options sentiment, the bought calls generally featured more realistic strike prices. But on February 6, optimistic traders bid up the BOWL Mar 15 ’24 25.00 Call. At the time of the transaction, BOWL stock traded between $13 and $14.
What was the reason for the confidence in buying long out-the-money (OTM) calls? While it’s difficult to pinpoint with absolute authority, it likely had to do with the extreme short interest placed against BOWL stock.
Currently, BOWL’s short interest as a percentage of its float clocks in at 90.9%. As well, the short-interest ratio was modestly elevated at 6.9 days to cover. That means bearish traders would need more than six trading sessions to unwind or cover their short positions.
And if you think a short interest of 90.9% represents a dubious record, it does. According to Fintel, BOWL stock is the most heavily shorted security in the market based solely on short interest of float. So, most likely, the contrarian bulls saw this metric and decided to wreak havoc.
Short Squeezes Give Everything Away
If you’re a fan of Formula One racing, you’ll know that tire regulations stipulate that drivers must use at least two different compound types (assuming no wet weather conditions). So, if a driver elects on the first pitstop to use the same compound type, other teams know that the driver is due back for another stop. Stated differently, such a move tips one’s hand.
Now, with bearish positions in the derivatives market, it’s extremely difficult to know true intentions. For example, a sold call at face value represents a bearish strategy: the seller of the call underwrites the risk that the target security will not rise above the listed strike price. However, just by looking at an options screener does not reveal whether the sold call is covered or uncovered (naked).
Some clues, such as extreme variance between volume and open interest, could tip off the magnitude of conviction in the trade. However, without inside details, it’s ambiguous whether a short call position is truly a short in the classical sense.
However, when we talk about short interest, no ambiguities exist. A trader borrows shares from a broker to initiate a true shorting activity; that is, selling the borrowed securities immediately, hoping that their value falls, picking up the shares on the cheap to return back to the broker, and pocketing the difference as profit.
Still, when too many traders engage in short selling, this dynamic creates more panic, as there’s more volume of money at risk. If the target security rises sharply – like what’s happening to BOWL stock currently – the bears may panic to avoid the ugly prospect of uncapped losses.
Remember, the folks who directly shorted BOWL stock must return the borrowed securities back to the lender. And with so many bears crowded into a single trade, an unexpected housefire can easily spark a panicked stampede out of the position. In turn, that could skyrocket Bowlero’s valuation.
Financial Considerations to Monitor
To be sure, no investment is perfect, and BOWL stock is no exception. One concern that investors should acknowledge is the slowing growth trend. For example, in Fiscal 2021, Bowlero posted revenue of $395.23 million as it struggled to recover from COVID-19. However, in the following year, sales shot up to $911.71 million. Last year, though, the sales tally came in at about $1.06 billion. And on a trailing-12-month (TTM) basis, sales are only approximately $1.09 billion, reflecting slowed momentum.
Nevertheless, an Ipsos poll showed that in 2022, bowling represented one of the two most popular participatory sports in America. With the economy booming and companies hiring, now doesn’t seem a good time to short BOWL stock.
Is Bowlero Stock a Buy, According to Analysts?
Turning to Wall Street, BOWL stock has a Strong Buy consensus rating based on six Buys, zero Holds, and zero Sell ratings. The average BOWL stock price target is $19.17, implying 27.5% upside potential.
The Takeaway: Don’t Get in Front of the BOWL Stock Train
Primarily, what makes BOWL stock compelling as a quick bullish options scalp is the extremely high short interest. At over 90%, it leads the field in terms of short interest by a country mile. With so many bearish traders betting against Bowlero, a swing to the upside could easily panic out the pessimists. In addition, the fundamental catalyst of bowling’s popularity adds another reason to consider BOWL.
