Trade of the Day: Krispy Kreme Doughnuts (KKD)

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I have traded options on Krispy Kreme Doughnuts (KKD) many times over the years, and I have been bearish on the name for the past few. Last year, I recommended six successful KKD put option trades to my Momentum Options traders, with three of them returning gains of 100%, 47% and 42%. The other three trades were winners as well, so you can see why I always look forward to the company’s earnings announcements.

Krispy Kreme is scheduled to report earnings on March 22, and I often mention how the company’s numbers aren’t always sweet. This former Wall Street darling failed to impress analysts in 2015 after reporting two flat quarters, a $0.02 beat and a $0.04 miss.

Shares have made a nice recovery off of the recent 52-week low of $12.90 that was tapped in mid-February. The 50-day moving average is trying to flatten out, and the 100-day moving average is curling higher.

KKD

This time around, the suits-and-ties are expecting a profit of $0.21 a share on revenue of $133 million. The high estimate has Krispy Kreme beating estimates by a penny, while the low estimate has penciled in a $0.02 miss.  Revenue could come in a million ahead or a million light.

With the regular March options expiring this Friday, option traders could look to the April chain for a speculative play on KKD.

Since I have mixed feelings on the stock, which has a bullish chart and sketchy fundamentals, I have been looking at a possible “strangle” option trade to play a major move in the shares.

The KKD April 16 calls (KKD160415C00016000) could be used by bullish traders expecting continued strength in the stock and a possible earnings beat with raised guidance. These options will double if shares are trading at $17 or higher come mid-April.

Bearish traders could target the KKD April 15 puts (KKD160415P00015000) for a possible earnings miss or lowered guidance and a move back towards the 50-day moving average. These options would double if shares are trading below $13.70 by mid-April.

Both aforementioned options, purchased together, would create a strangle option trade with a combined cost of $1.15. The breakeven points would be $17.15 and $13.85. A double, or 100% return, would occur if KKD shares are above $18.30 or below $12.70 by mid-April.

There is no need to “rush” into either aforementioned call or put option, although I do favor the call options at current levels. I’m going to be watching how KKD starts the week, and I will decide if there is likely to be continued strength or perhaps upcoming weakness before possibly playing the action.

To receive further instructions on this trade, please sign-up for a risk-free, 60-day trial of Momentum Options and take advantage of 50% off the introductory rate for the next three days only.  You’ll also receive my brand new March Stock Watch List, and 6 other key option trading reports.


Article printed from InvestorPlace Media, https://investorplace.com/2016/03/kkd/.

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