How Krispy Kreme Doughnuts (KKD) Bulls Got Burned

Krispy Kreme Doughnuts call buyers had high hopes for earnings


Published on Dec 10, 2014 at 10:11 AM
Updated on Apr 20, 2015 at 5:09 PM

Krispy Kreme Doughnuts (NYSE:KKD) is down 6.7% out of the gate, following last night's disappointing third-quarter earnings report. This more than wipes out the stock's 4.6% year-to-date advance, as of last night's close at $20.18. However, on the options front, traders have been betting on a move higher in recent weeks.

During the last 50 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), KKD has racked up a call/put volume ratio of 2.21, which rests in the 95th percentile of its annual range. It was no different on Tuesday, when calls crossed at 17 times the expected single-session rate. Expectations for a big post-earnings move were on the rise, per KKD's 30-day at-the-money implied volatility, which spiked 12.2% to 60%.

Looking more closely, the security's most active option was the December 22 call, where almost 3,000 contracts were exchanged -- triple the next most popular strike. More than three-quarters traded at the ask price, and 2,416 contracts translated into open interest overnight, making it safe to assume bullish bets were initiated. In short, these speculators anticipate KKD will finish above $22 at the close on Friday, Dec. 19, when front-month options expire.

The prospects of this happening have grown extremely dim, in light of today's sell-off. In fact, delta on the Krispy Kreme Doughnuts (NYSE:KKD) call has plummeted to 0.093, from 0.31 at Tuesday's close. In other words, the options market is now pricing in a less than 10% chance of this call expiring in the money.

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