Kratos Defense & Security Solutions Inc. (KTOS) Crashes After Meteoric Rise

Bullish options traders can't be happy with Kratos Defense & Security Solutions, Inc's (KTOS) sudden reversal lower

by Alex Eppstein

Published on Aug 29, 2016 at 10:48 AM

After a rapid run up the charts earlier this month, Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) is selling off sharply. At last check, the defense stock is down 6% at $6.99, after KeyBanc downgraded its rating to "sector weight" from "overweight." Suffice it to say, the confidence seen among KTOS options traders of late may be getting shaken.

Heading into today, KTOS was sitting on an incredible 68.7% month-to-date gain. Moreover, the stock notched an annual high of $7.58 late last week. Much of the shares' technical strength can be traced back to the company's early August earnings beat and upwardly revised full-year sales guidance.

As such, bullish options betting has really picked up in recent weeks. For example, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open nearly 1,200 KTOS calls over the last 10 sessions, compared to 65 puts.

Not all of these bets are necessarily bullish. With over 17% of the stock's float sold short -- or about eight times its average daily trading volume -- it's possible short sellers have been buying calls to act as an upside hedge. But for "vanilla" call buyers, today's retreat in KTOS shares is certainly a setback.

In reality, though, Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) may have already been headed for a pullback. After weeks of sharp gains, the stock's 14-day Relative Strength Index (RSI) reached 84 at Friday's close -- well into "overbought" territory, suggesting today's speed bump may have been in the cards.

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