Options Traders Blitz Kansas City Southern Stock Ahead of Earnings

KSU hit a nearly three-year high in December

Jan 18, 2018 at 2:37 PM
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Railroad stock Kansas City Southern (NYSE:KSU) has been a steady climber over the past two years, with the shares recently enjoying support from their 20-week moving average. KSU was last seen trading at $111.57, not far from its nearly three-year high of $114.85 from early December. Options activity has picked up in recent weeks, too, ahead of the company's early morning earnings tomorrow, as total open interest just hit an annual high.

kansas city stock january 18

Digging deeper shows traders on both sides of the aisle have been targeting the security. On the one hand, call buying has nearly doubled put buying during the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX).

Yet, KSU has a Schaeffer's put/call open interest ratio (SOIR) of 4.60, and that ranks in the put-skewed 92nd annual percentile -- showing put open interest outweighs call open interest among contracts expiring within three months by an unusually wide margin. However, this data is skewed by peak open interest at the January 2018 90- and 100-strike puts, with most of the activity occurring in late October.

In the past 10 days, though, the most popular option based on increases in open interest has been the February 105 put. Data from Trade-Alert shows most of these contracts crossed at the ask price just over a week ago, hinting at bearish expectations for the next month.

If Kansas City Southern shares are going to test fresh highs, they'll need to contend with rising short interest levels. For instance, the number of shorted shares jumped by almost 68% in the past two reporting periods. However, the equity's ability to rise amid such intense selling pressure speaks to its underlying strength.

KSU has performed well in the session after earnings in recent quarters, as well, ending positive after three of the past four reports. In January last year, the shares jumped 4%, and this time around the options market is pricing in a one-day swing of 3.5%, based on at-the-money implied volatility data. Another positive earnings reaction could sway skeptical analysts, with six of 11 still maintaining a tepid "hold" recommendation.

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