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Sonic: Buying Calls Ahead of Earnings

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In-the-money calls would benefit from a spike in stock price.

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MINYANVILLE ORIGINAL Sonic (NASDAQ:SONC) has one of the better balance sheets and returns on equity as well as relatively low valuation within its sector versus competitors like McDonald's (NYSE:MCD) and Red Robin Gourmet Burger (NASDAQ:RRGB). [Editor's note: See the author's analysis of Sonic here.]

While no one can seem to touch McDonald's margins thanks to its scale and efficiency, Sonic stacks up favorably in terms of value and ROE. The growth rate is also a respectable 15% over the past five years, though I will admit that expansion is somewhat limited given the current business model which relies on seasonable weather and a car culture.

That said, I think the stock, which has gained some 40% over the past 52 weeks, has the potential for further gains. The chart has been consolidating between $9.50 and $10.50 for the past month and shows support at the $10 level. The upcoming earnings report slated for October 16 should provide a catalyst for a new leg higher.

I'm looking at buying the November $10 calls for $0.60 per contract. These slightly-in-the-money options will benefit from a pop in the stock price, but because they still have over 30 days remaining until expiration, they won't suffer much time decay or the decline in implied volatility that usually follows an earnings report.

Twitter: @steve13smith

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No positions in stocks mentioned.

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