Kroger Option Trader Makes $2.3M Bearish Bet That Stockpiling Rally Is Over

Kroger Co KR has been one of the best-performing stocks in the entire S&P 500 in the past six months, gaining 34.3% overall.

However, one large bearish Kroger option trade suggests at least one trader believed the rally has run out of steam.

The Trade

On Tuesday, Benzinga Pro subscribers received the following option alert related to an unusually large Kroger option trade:

• At 11:44 a.m. a trader bought 6,131 Kroger put options with a $34 strike price expiring on July 17 at the ask price of $3.80. The trade represented a bearish bet worth more than $2.32 million.

See Also: How To Read And Trade An Options Alert

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the Kroger trade, it could represent an institutional hedge.

Stockpiling Boom Over?

Last week, Kroker CEO Rodney McMullen updated investors on the boom in grocery sales created by COVID-19 in a “fireside chat” with analysts from Evercore ISI. McMullen said stockpiling drove 30% same-store sales growth for Kroger in the month of March.

McMullen said the stockpiling phase of the market reaction to the outbreak has now passed, but Kroger remains in a phase in which shoppers are spending more than usual due to dining and travel restrictions. Online sales have driven much of that growth. Evercore estimates Kroger’s online sales have risen by 3% since the outbreak.

“The growth there has been substantial, and the growth has been substantial both in terms of pickup and delivery,” McMullen said.

McMullen said it’s too early to speculate on the next phase of consumer behavior as the economy begins to open back up.
Wall Street is also cautious about what’s coming next for Kroger. In the past week, Citi downgraded Kroger from Buy to Neutral with a $32 price target. JPMorgan reiterated a Neutral rating and raised its price target to $33.

Earlier this month, S3 Partners identified Kroger as a potential short squeeze candidate if the stock market rally resumes.

Bullish sentiment among StockTwits messages mentioning Kroger was at 93.2% on Tuesday, up from 86.2% one month ago.

Benzinga’s Take

The bad news for Kroger bulls is that the puts purchased on Tuesday don’t expire until mid-June, suggesting the berish trade is more than just a bet on a short-term pullback. The July Kroger puts have a break-even price of $30.20, which implies about 6.1% downside from current levels.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Photo by Jonesdr77/Wikimedia.