Kroger Stock Setup For Another Stretch of Volatility

Options activity on the grocery name has been very bearish

May 17, 2018 at 2:23 PM
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It's been a volatile two-year stretch for Kroger Co (NYSE:KR). In fact, KR has a Schaeffer's Volatility Scorecard (SVS) of 89, which shows it's consistently made bigger moves than the options market was expecting over the past 12 months. This choppy price action is continuing today. The stock was up as much as 5.7% earlier, but was last seen trading just 1.6% higher at $25.34, following news the company made a deal with online grocery retailer Ocado to use the Britain-based company's delivery technology in the U.S. Kroger will take a 5% stake in Ocado as part of the agreement.

kt stock price

Clearly, it wouldn't be surprising if the $26 level -- site of two gaps since November -- proves to be short-term resistance for the security. KR has also been plagued by enormous interest from short sellers. In the last two reporting periods alone, short interest increased 82.4%, and the short interest ratio has moved up to 7.00 -- what we could deem an elevated level. On the other hand, an extended breakout above the $26 level could result in a short squeeze situation where the shares potentially revisit the $30-$31 region that's marked the peak of their past two rallies.

Either way, the stage appears to be set for Kroger to make a big move in either direction. Options traders are betting this occurs to the downside, according to the equity's 10-day put/call volume ratio of 1.88 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This reading ranks in the bearish 80th annual percentile.

Puts are popular today, too, more than doubling their call counterparts so far. Most popular is the July 26 put, followed by the soon-to-expire May 25.50 put. Data on both contracts suggests buy-to-open activity could be taking place, which would mean traders are betting against Kroger. Either way, it's a good time buy premium, based on KR's Schaeffer's Volatility Index (SVI) of 28%, just nine percentage points from an annual low.

While many are betting against the grocery chain, financial publication Barron's just featured a bullish write-up on the stock, saying it could rally back to $30 in the next year. Elsewhere, Schaeffer's Quantitative Analyst Chris Prybal recently pointed out how Kroger's price-to-book value per share ratio is hovering just above 3. The last time the metric fell to this level was back around October when the stock bottomed near $20. Keep in mind the company's name has been tossed around on the M&A front, too.


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