Trade of the Day: Krispy Kreme Doughnuts (KKD)

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Krispy Kreme Doughnuts (KKD) has been making lower highs and lower lows since mid-June. Shares tested a low of $16.50 last Monday, and the 52-week low that tripped in October of 2014 is at $16.42.

The 50- and 100-day major moving averages are moving sharply lower, and the 200-day moving average appears to be at the beginning of what could be a nasty fall.

The three-year monthly chart for Krispy Kreme shows risk to $15-$14.50. A move below the latter could lead to $12-$10, but that gift might be too much to ask for.

To play Krispy Kreme’s slide, I recommend buying the KKD November 16 puts (KKD151120P00016000) around $1.05.

I do not have a stop loss in place at the moment, but my exit target for these puts is $2.10. If shares test $14.50 by mid-November, the put options will be worth $1.50 or more for a gain of 40% or greater. If shares test $14, the trade would double, as the put options would be more than $2 in the money with the time premium remaining.

My Momentum Options subscribers have done well with put options on Krispy Kreme this year, as we have taken profits of 100%, 47%, 42%, 9% and 8% in previous downside KKD trades. In general, we have done well so far with bearish bets, but there is always the element of surprise.

What makes this trade exciting and more risky is that Krispy Kreme is scheduled to announce earnings next week on Sept. 9.

Wall Street’s sweet darling will have to deliver a massive quarter to impress the suits-and-ties. Historically, Krispy Kreme plays cat-and-mouse games when it comes to the company’s guidance, and I even mentioned that the company would beat estimates last time around.

The more important issue is that KKD has been missing on revenue numbers, and I think that trend will continue this quarter. Analysts are expecting a reading of $0.18 a share on revenue of $131.79 billion. Krispy Kreme is going to need to come in at $132+ billion, while a penny-per-share beat might please the Street.

The earnings numbers are the risk to this trade, but I’m hoping that the bearish technical picture for Krispy Kreme trumps a doubtful outlook and another revenue miss.

Short-term resistance for Krispy Kreme shares is at $17, followed by $17.25-$17.50 on a close above this level.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/trade-of-the-day-krispy-kreme-doughnuts-kkd-2/.

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