Why Kratos Options Traders May Want to Target Calls on the Defense Stock

Kratos stock is worth a second look, as U.S. airstrikes in Syria bring the defense sector into focus

Apr 7, 2017 at 11:00 AM
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Defense stocks are having a strong day, following U.S. airstrikes in Syria. Shares of Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) -- which specializes in missile defense and surveillance systems -- are benefiting from sector tailwinds, up 0.4% at $7.91. Earlier, in fact, KTOS stock was as much as 2% higher and atop the $8 level -- a region that's served as both support and resistance in recent months. Moreover, for options traders, now is a good time to strike on Kratos shares.

Before diving into the current opportunity in the options pits, it's worth noting the stock's technical strength. On a year-over-year basis, KTOS has surged more than 60%. Since touching a five-year high of $9.19 in mid-February, the stock has been consolidating its gains, but now looks to be springing off its rising 100-day moving average:

kratos stock chart today with 100 day moving average

For options traders looking to place a short-term bet on KTOS, now is an opportune time. The stock's Schaeffer's Volatility Index (SVI) of 42% ranks in the low 4th annual percentile. Not to mention, the stock's 30-day at-the-money implied volatility of 54.9% lies in the bottom quartile of its 52-week range. In other words, near-term options are attractively priced at the moment, historically speaking.

From a contrarian perspective, Kratos options traders may want to think about making those bets bullish, too -- not only due to the strong technicals, but also due to widespread pessimism toward the shares. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.71 sits at an annual high, suggesting an extreme appetite for puts over calls among options expiring in the next three months. Plus, nearly 11% of KTOS' float is sold short, hinting at short-covering potential.

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