Friday at last! Friday at last. 

The college football season got underway last night with the South Florida Bulls routing the 25th-ranked Boise State Broncos, 34-7. While there’s another top 25 team in action tonight -- number 12 Illinois -- the majority of top 25 teams play on Saturday. The following Thursday, NFL football begins with the Cowboys playing the Eagles in Philadelphia. Can’t wait. 

Enough about football; I'm here to discuss unusual options activity. In Thursday's trading, there were 796 calls and 533 puts, resulting in a put/call ratio of 0.67, a slightly bullish indicator. Among the 533 puts were two Wendy’s (WEN) puts expiring in 50 days on Oct. 17. 

As you can see above, both of the puts are OTM (out-of-the-money), with the $9 strike possessing the highest Vol/OI (volume-to-open-interest) of any unusually active option yesterday at 150.09, almost double the put in second place. 

Not a lot has gone right for the fast food chain in recent years. Its stock is down 36% year-to-date and 52% over the past five years. Its shares are well down from the 20-year high of $29.31 set on June 1, 2021. 

Wendy’s wouldn’t be the first stock I would think to invest in at the moment. That said, the two unusually active puts suggest someone could be looking to protect their downside. 

With that in mind, here are three potential trading strategies to implement based on Wendy’s two puts. 

Have an excellent weekend.  

The Straight Up Play

Starting with the most obvious, you have three possibilities: buying a long put for downside protection, profiting from further correction in the share price, or selling a short put for premium income. 

In terms of downside protection, the $10 strike is the better play with a profit probability of 25.80%. The share price must fall below $9.60 (8.57%) to make a profit from the trade. The $9 strike has to fall 15.71% over the next 50 days. The likelihood of that happening is 13.01%, so it's not likely. 

Whether you own the stock and are looking to protect on the downside or to profit from a further correction, the $10 strike is the way to go. 

Now, if you believe that the stock has fallen as far as it can go and want to generate some income by selling the put, it’s tempting to sell the $10 strike. However, the $9 strike is the better bet to avoid having to buy 100 shares at $10 at expiration, above where they might be trading. 

While your annualized return is considerably less than 22.6% at 8.2%, that’s still a reasonable return to augment your portfolio.  

The Bullish Play

In this scenario, you expect Wendy’s share price to appreciate over the next 50 days. Utilizing a bull put spread, you sell a short put option and buy a long put option at a lower strike price, with both expiring on the same day. In this example, you sell the $10 put and buy the $9 put. 

Your maximum profit is the net credit, which is the difference between the premium income of $30 from selling the $10 short put and the cost of buying the $9 long put for $15. In this instance, it’s $15.  

On the other hand, the maximum loss is the difference between the two strike prices, less the net credit. This occurs if Wendy’s share price is below $9 on Oct. 17. The maximum loss in this instance is $85 [$10 put strike - $9 put strike - $15 net credit]. 

So, if the share price is $9.85 at expiration, you break even. If the share price is $9.95 at expiration, for example, you make $10 [$15 net credit - ($10 strike price - $9.95 share price)]. If the share price at expiration is above $10, you make the maximum profit of $15.  

The likelihood of this happening is 69.4%, with a risk-to-reward ratio of 5.67 to 1. I probably wouldn’t make this bet given the high risk/reward ratio. 

The Bearish Play

In this scenario, you expect Wendy’s share price to fall over the next 50 days. Utilizing a bear put spread, you buy a long put option and sell a short put option at a lower strike price, with both expiring on the same day. In this example, you buy the $10 put and sell the $9 put. 

Your maximum profit is the difference in strike values minus the net debit. The net debit is the $40 cost of buying the $10 long put, less the $10 premium received for selling the $9 short put. In this instance, it’s $30. The maximum profit is $70 [$10 strike price - $9 strike price - $30 net debit]. The maximum profit is achieved if Wendy’s share price is below $9 strike price at expiration.   

The maximum loss is the net debit of $30. This occurs if Wendy’s share price is above $10 on Oct. 17. 

So, if the share price is $9.70 at expiration, you break even. If the share price is $9.40 at expiration, for example, you make $30 [($10 strike price - $9.40 share price) - $30 net credit]. If the share price at expiration is below $9, you make the maximum profit of $70.  

The likelihood of this happening is 26.4%. However, with a risk-to-reward ratio of just 0.43 to 1, the bear put spread is a better bet than the bull put spread. 

The Bottom Line on Wendy’s Unusually Active Options

When you consider that the strategy of selling the $10 short put generated $30 premium income, three times the $9 put, it’s tempting to choose the higher-priced option. As I said in the section about straight-up plays, I wouldn’t do it. 

I especially wouldn’t do it when you can generate $70 of premium income, 2.3 times more than selling the put, by utilizing the bear put spread, whose risk/reward ratio is more than reasonable. It's the best strategy for Wendy's stock.