Options Traders Target Pre-Earnings Puts on Kroger Stock

Put players may be eyeing a short-term floor for Kroger Co (KR)

Feb 27, 2017 at 10:54 AM
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Grocery chain Kroger Co (NYSE:KR) is due to report quarterly earnings before the market opens this Thursday. Ahead of the event, options traders have been targeting puts at an extreme rate. Bearish speculators could be pleased today, too, as the shares are trading down 2.9% at $32.33 on news Wal-Mart Stores Inc (NYSE:WMT) is conducting price comparisons, taking aim at both KR and Germany-based Aldi. Still, while there's reason to believe not all put players are KR bears, given the stock's history of post-earnings moves, those who are pessimists could be put on notice this week.

Over the past 10 sessions at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have purchased nearly three KR puts for each call. The resulting put/call volume ratio of 2.85 ranks higher than 96% of all readings from the past year, meaning puts have been bought to open over calls at a near-annual-high clip. Plus, the stock's Schaeffer's put/call open interest ratio (SOIR) of 2.55 is docked at an annual peak, while its front-month gamma-weighted SOIR is perched 8.49 -- pointing to a pronounced put-skew among short-term speculators.

However, roughly 1.6 KR puts were sold to open for each one bought over the last 10 days, suggesting some of the recent put activity was neutral-to-bullish in nature. In fact, KR's top open interest position by a mile is the March 32 put, with over 35,000 contracts outstanding. Data from the major exchanges indicates most of these positions were sold to open in recent weeks. Simply stated, put sellers expect the $32 level to serve as a floor for KR shares through the front-month expiration, at the close on Friday, March 17.

Outside of the options pits, short interest on KR fell by about 25% in the two most recent reporting periods. And with 12.4 million shares sold short, these bearish positions are seated at their lowest level since November 2013. Meanwhile, more than half of the 18 analysts covering the grocery stock rate it a "buy" or better, while only two recommend selling KR. And the average 12-month price target is docked at $36.09 -- a level the equity hasn't seen on a closing basis in seven months.

Upbeat pre-earnings expectations would make sense, given KR's largely positive earnings history. Over the last eight quarters, the stock has moved to the upside in the session subsequent to reporting six times, including a 3.3% gain in the most recent quarter. The shares have moved an average of 3.7% in either direction in the post-earnings session, but the options market is currently pricing in a slightly wider 5.7% swing for Thursday's trading.

From a technical standpoint, however, KR hasn't given shareholders much to cheer about lately. The stock has fallen 18% year-over-year, and today's losses have Kroger Co (NYSE:KR) giving up its foothold above the 120-day moving average -- a trendline that has kept the shares in check since December. Still the underfoot $32 level could emerge as fresh support for the shares on a deeper decline, as it did in August of last year.

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