Options Bears Won Big On This Struggling Food Stock

Traders banked a 100% profit from KHC put options

by Patrick Martin

Published on Feb 15, 2018 at 1:31 PM
Updated on Feb 15, 2018 at 1:31 PM

Subscribers to Schaeffer's Option Advisor service recently doubled their money on Kraft Heinz Co (NASDAQ:KHC) April 82.50 puts. We're going to dissect the options trade below, looking back at what originally attracted us to KHC and how the stock performed after we recommended the puts.

We recommended the put option in late December. KHC shares at that time had bounced off their late-October annual lows, but the rally was quickly stopped short at the key $82 region -- which marked a $100-billion market cap for Kraft, and coincided with a familiar ceiling at the 120-day trendline. After failing to move above this important resistance level, KHC declined sharply into the $70 area, roughly 10% below the 2017 closing price. 

Further illustrating the security's weak technical footing was the fact that analysts were optimistic toward KHC, even amid its long-term technical troubles. Of the 13 brokerages that covered the shares, nine maintained a "buy" or better rating, with not a single "sell" on the books. Possible downgrades would pressure the security even lower. 

Short sellers also proved to be a thorn in KHC's side. Short interest was up 66% year-to-date to 18.3 million shares -- a record high. The stock was facing potentially bigger headwinds as shorts continued to increase their bearish exposure. 

It was also a compelling time to buy premium on the stock, per a pair of volatility indicators we track. The equity's Schaeffer's Volatility Index (SVI) of 16% ranked in the 19th annual percentile, while its 30-day at-the-money implied volatlity of 15.5% arrived lower than 90% of all comparable readings taken in the past year.

As we predicted, the stock continued to slide, with help from broad-market headwinds. With KHC falling to a two-year low of $70.24 on Feb. 9, we closed our position, enabling subscribers to Option Advisor to capture a 100% profit on the put trade in a little over a month.

Trade Postmortem KHC


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