What We're Trading: Sentiment Could Reinforce Resistance for Kroger Co (KR)

Kroger Co's (NYSE:KR) recent rally ran out of steam at the historically significant 320-day moving average -- which could be reinforced by hefty call open interest

Jan 4, 2017 at 8:15 AM
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Grocery chain Kroger Co (NYSE:KR) hit a record high at the tail end of 2015 and has been chopping lower ever since, giving up longstanding support at the 12-month moving average. After tapping a 2016 bottom in October, the shares rallied back about 25%, but ran out of steam in mid-December at the 320-day moving average. KR is now docked below the $35 mark, which roughly corresponds with double the stock's 1999 high. Moreover, peak open interest among all the stock's options currently resides at the January 2017 35-strike call. As hedges related to these bets unwind in the coming weeks, this level could be reinforced as resistance for the shares.


161230KR

 

As KR's recent rally has stalled out, short sellers have been increasing their positions. Short interest on the stock climbed by 13.3% during the most recent two-week reporting period, but represents just 1.7% of the equity's total float -- leaving plenty of room for further bears to pile on, putting pressure on the shares. KR could also be overdue for downgrades from the brokerage bunch. At present, more than half of the firms tracking the stock rate it a "buy" or better.

It is also a particularly attractive time to pick up KR's short-term options. With a Schaeffer's Volatility Index (SVI) of 25% -- lower than 82% of all comparable readings from the past year -- the stock's near-term options are pricing in unusually low volatility expectations at the moment. In addition, our recommended put option has a leverage ratio of negative 6.2, and will double in value on a 13.9% decline in the underlying shares -- a drop that would put KR just above its 2016 lows.

Subscribers to Schaeffer's Weekend Series service received this KR commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Series is one of our most popular trading services.

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