An Option Play For Darden's Bullish Move

| About: Darden Restaurants, (DRI)

With the economy making improving progress and consumers slowly starting to make more discresionay purchases, shares of restaurant stocks have been gaining traction lately. Restaurants and bars are classified in the consumer services sector, and this sector is up 21.69% in the last six months and the restaurants and bar sector is up 23.78% in the last six months. In 2011 many consumers cut back on discresionary spending at casual dining restaurants since quick service restaurants offered value-oriented meals for cheap prices.

For 2012, I still believe quick service restaurants will keep performing to the upside, but if the economy continues to slowly improve we could see more consumers make the transition from quick service to casual dining. Now, I am not saying that consumers won't visit their local McDonalds (NYSE:MCD) or Starbucks (NASDAQ:SBUX) every now and then, but in a improving economy consumers have the ability take money they would ordinary spend at quick service restaurants and spend the extra couple of bucks at a casual dining restaurant. There are many restaurants to consider for a good meal, but also for an investment and if that investment pays off then your next meal could be free. One restaurant company to consider for a good meal and investment is Darden Restaurants (NYSE:DRI).

Darden Restaurants operates 1,860 restaurants under six brands by the names of Red Lobster, Olive Garden, Longhorn Steakhouse, The Captial Grille, Bahama Breeze and Seasons 52. In a way Darden Restaurants can be seen as a conglormate of casual dining with their exposure to different cuisines. Darden Restaurants is having a two upcoming events than can be viewed as possible catalysts for the company. Darden is having a analyst day on February 24 and Darden Restaurants is expected to report earnings the week of March 26th. If investors are bullish on the strength of Darden Restaurants, here is an option strategy to consider

Trade: April 50/55 Call Spread

Buy one April 50 call = 2.25

Sell one April 55 call = 0.50

2.25-0.50 = 1.75 (1.75 X 100= $175 Per spread contract)

Break-even = 51.75 (50 + 1.75 = 51.75)

Max profit per spread (55-50 = 5) Now take 5-1.75 = $325 max profit per spread)

Reasons for using a vertical spread on Darden restaurants

One would want to use a vertical call spread when you expect to see a moderate increase in price to the call you are selling. While the April 50 calls do not look expensive, I like to use vertical spreads since my risk is defined and Darden Restaurants is also getting close to its all time high of around $53.28

Over the last year Darden Restaurants has been in a Range of $42 to $52, and the stock is up over 10% since the start of the new year. When looking at the chart below of Darden Restaurants investors will notice that Darden is above its 50, 100 and 200 day moving averages and been hovering in the upper part of its bollinger band since Feburary 3, 2012. Stocks that continue to produce positive results and gain momentum can keep riding in the upper part of their bollinger bands for a while, but sooner or later a pullback will happen.

Chart forDarden Restaurants, Inc.

With the market getting close to 13,000 and the S&P above 1350, it's possible stocks that are trending higher could take a pause and slightly pullback. Wheather you like the vertical spread idea or just want to purchase stock, where you buy in at can make or break your trade. Here are some trade ideas if you are bullish on Darden Restaurants.

Trade idea 1: Bullish

Wait for a small pullback and buy the April 50/55 vertical call spread ahead of analyst day.

Trade idea 2: Bullish, but wait for analyst's day and then decide where you want to enter a trade at.

Analyst's day is scheduled for February 24, 2012 starting at 8:00 a.m. and running till 12:00 p.m. Eastern. On February 15, 2012 Credit Suisse published an analyst report on Darden Restaurants called, "Analyst Day Wish List" written by research analyst's Keith Slegner and Karen Holthouse. The report mentions what slides investors should focus on and things that should be asked that are not listed on the slides to give further explanation. Some of the topics that I found interesting that are up for possible discussion are profitability by concept, future marketing, promotion plans and food inflation vs. pricing.

There seems to be a certain amount of focus on Olive Garden for the analyst day since Darden restaurants blamed some of its problems on the performance of Olive Garden during the last quarter. Here's a link for a video on Dec 6, 2011 when Darden Restaurants cut their earnings outlook. At the time of this video Darden Restaurants was trading at the $42 level and two months later has risen about $8. If Darden can have positive results coming out of their analyst day, then heading into earnings this stock could have more room to the upside.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DRI over the next 72 hours.