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Kroger Rally Lures Option Bulls

KR fans are scooping up April-dated calls

by 9/12/2012 12:26 PM
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Option bulls have taken a shine to The Kroger Co. (NYSE:KR - 23.71) of late, with call volume rising in parity with the stock. In fact, during the past two weeks, investors have bought to open more than three KR calls for every put on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). What's more, this ratio stands higher than 84% of all others of the past year, pointing to a much healthier-than-usual appetite for optimistic positions.

Echoing that trend, the grocery guru has already seen more than 5,000 calls change hands today -- more than seven times its average intraday call volume. Meanwhile, just over 1,100 KR puts have been exchanged.

Digging deeper, it seems speculators are honing in on longer-term calls, as the April 23 and 25 calls have seen volume of about 2,100 and 1,300 contracts, respectively. All of the calls have crossed at the ask price, and volume has exceeded open interest at both strikes, hinting at buy-to-open activity.

By purchasing the calls to open, the buyers are betting on KR to extend its uptrend over the next several months. Specifically, the volume-weighted average price (VWAP) of the 23-strike calls is $1.85, while the VWAP of the out-of-the-money calls is $0.99. As such, the April 23 call buyers will profit if KR surmounts the $24.85 level (strike plus premium paid), while the April 25 call buyers will reap a reward if the equity topples the $25.99 level.

As alluded to earlier, the shares of KR have been on fire in the wake of the company's stronger-than-expected earnings release last week. In fact, the stock has tacked on about 6.4% so far in September, and is on pace to end the week north of its 60-week moving average for the first time since early April. This trendline acted as a foothold in the first few months of the year, and could resume its role as support. Furthermore, KR is on pace to finish the week atop the $23.50 level -- a feat not accomplished in about five months. This former area of resistance could also translate into a layer of support for the shares.

However, while the options arena is bullishly biased towards KR, not everyone on Wall Street is a fan. Currently, half of the 18 analysts following the security deem it a "hold," "sell," or worse. Plus, the consensus 12-month price target on the equity sits at $26.28, representing a premium of just 12% to KR's closing price of $23.40 on Tuesday. Should the security continue its upward momentum, a round of upbeat analyst attention could add contrarian fuel to the fire.

Weekly Chart of KR since December 2011 With 60-Week Moving Average


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