Wall Street's next short squeeze could be in this fast food stock, trader says

The stock of Jack in the Box could soon live up to its name.

Rising short interest in shares of the West Coast-based fast-food chain appears to be setting the stock up for a short squeeze, Danielle Shay, director of options at Simpler Trading, told CNBC's "Trading Nation" on Friday.

"I like Jack in the Box here, but for a short-term options trade," Shay said.

Though the stock is not far off its all-time highs, which would usually preclude Shay from buying in, she made an exception on account of the unusual activity. Jack in the Box currently has 9.2% short interest, according to FactSet.

"With something like this that has short interest, it does have the potential for a short squeeze and it has earnings coming up," Shay said. "For that reason, I do like to trade shorter-dated calls in the earnings series. That way, I can take advantage of just the momentum going into the earnings report and the rise in [implied volatility]."

For investors seeking a longer-term trade in the space, Shay suggested the stock of McDonald's.

"If you look at a weekly chart of McDonald's, it has been consolidating for quite some time. I do believe that that consolidation is going to break out to the upside. I'm targeting $240," she said. "It's a little bit more of a long-term trade, so, you could sell put credit spreads on a regular basis [or] buy long calls 90-120 days out."

McDonald's shares ended trading down less than half of 1% at $213.90 on Friday.

"It's going to take a while for restaurants that depend on indoor dining," Shay said. "People are going to be concerned about going. They're not able to open up at full capacity. … For me personally, I would rather focus on the fast-food chains that their model already is specifically focused on drive-thru."

Limited-service restaurants are a better bet than their full-service counterparts right now, Piper Sandler's Craig Johnson agreed.

"That's where you're starting to see some of the same-store sales comps really showing to be positive," he said in the same "Trading Nation" interview, pointing to a chart of Chipotle Mexican Grill.

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"This has been a long-term winner. It's a name that we've owned in our model portfolio for some time and we still think it should be bought," Johnson said, noting that the stock is above its 50 and 200-day moving averages, in an upward channel and showing strong performance relative to the S&P 500.

"This stock looks like it still has more room to run," he said. Chipotle ended trading down 1% on Friday.

Johnson's second pick was the stock of Chili's parent Brinker International.

"On a weekly chart looking back a handful of years, you'll see that you've finally reversed a downtrend off of those '14 highs and now we're breaking out to new highs," he said.

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Brinker's performance is also strengthening relative to the S&P, "providing confirmation to us that there is something positive happening here," Johnson said. Brinker shares closed about half of 1% lower on Friday.

"It looks like a lot of these restaurants are looking in really good technical shape for another leg higher," Johnson said.

New York City restaurants reopened for indoor dining at 25% capacity on Friday.


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