GrubHub Shorts Could Hold the Key to Higher Highs

Options activity on GrubHub Inc (NYSE:GRUB) has been on the upswing over the past year. Currently, there are 126,283 options open on GRUB stock -- 100,436 calls and 25,847 puts -- in the 93rd annual percentile, and fewer than 22,100 contracts shy of the 12-month peak of 148,356 contracts hit on Aug. 4. As a point of comparison, total open interest fell to a 52-week low of 19,448 contracts on Sept. 19, 2016.

The bulk of this activity has centered at the January 2018 45-strike call, where 46,620 contracts reside -- GRUB's top open interest position. While it's not clear whether these positions were bought or sold, Trade-Alert indicates most of the activity occurred in May and June, when the stock traded as low as $41.35 (June 12) and as high as $47.84 (June 23), and proceeded a late-April earnings bull gap.

More recently, the September 55 call has been GRUB's most active option in the past two weeks, with 1,062 options traded. This strike is home to peak front-month open interest of 2,578 contracts, and data from the major options exchanges confirms buy-to-open activity. In other words, traders expect the equity to settle north of $55 at tomorrow's close, when the options expire.

This increase in options trading has coincided with GrubHub stock's surge up the charts. Year-over-year, the shares have added nearly 33%, and almost 47% year-to-date. In fact, the shares topped out at a record high $57.61 on Sept. 7, and was last seen trading at $55.31 -- well above the $54 floor the security established following its early August bull gap. 

GRUB could be due for even more upside, too, should short sellers and analysts start to capitulate to the equity's positive momentum. Short interest on GrubHub has more than doubled year-to-date to 19.36 million shares. Not only does the stock's ability to rally to record highs amid such intense selling pressure speak volumes to its underlying strength, but it would take more than three weeks to cover these bearish bets, at the average pace of trading.

A number of analysts remain skeptical of GRUB shares, as well, with five of 16 maintaining a "hold" or worse rating at last night's close. Plus, D.A. Davidson this morning initiated coverage with a "neutral" rating and $48 price target -- below the average 12-month price target of $54. This leaves the door open for upgrades and/or price-target hikes, which could draw more buyers to GrubHub's table.