SunTrust Says Shake Shack Among the Restaurant Stocks to Own In 2018

Brokerage firm SunTrust Robinson weighed in bullishly on the restaurant sector today, saying it expects tax reform to provide tailwinds for the group. Included in the note was a price-target hike for burger chain Shake Shack Inc (NYSE:SHAK) to $60 from $50. SHAK stock has added 7.6% as a result to trade at $47.01, earlier hitting a two-year high of $47.39. However, options traders are seemingly betting on a pullback.

More than 3,600 put options have traded so far, compared to an average daily volume of just 672. This is due to heavy demand for the front-month January 2018 45- and 46-strike puts. All signs point to buy-to-open activity at both contracts, which would mean traders are expecting Shake Shack to fall below $45 and $46 before the close on Friday, Jan. 19, when the options expire.

Others may want to think twice about grabbing SHAK put options, considering its 30-day at-the-money implied volatility skew of 15.8% ranks in the 91st percentile. In other words, volatility premiums for puts are much larger than normal compared to those for call options.

There are plenty of other skeptics outside of options traders. That is, short interest remains very elevated on Shake Shack stock, with the number of shorted shares rising steadily since early 2015. More than 9.6 million shares are currently sold short -- more than 10 times the security's average daily trading volume.

Considering SHAK shares have rallied more than 43% in the past three months alone, some of these bears could be feeling the pressure. This makes the equity a prime candidate for short squeeze-related tailwinds.