Kroger call options heat up before quarterly results

By Doris Frankel

CHICAGO (Reuters) - Some option participants on Wednesday said an unusual jump in bullish option trades in Kroger Co (KR.N), the largest U.S. grocery chain, may be due to positioning ahead of its quarterly results next week.

Kroger is slated to report fiscal second-quarter earnings on September 16, four days before September 19 options expiration and its call volume was heavier than usual, suggesting that many investors expect short-term strength in the shares of the grocery chain.

A call gives the right to buy a company's stock at a given price and time while a put conveys the right to sell the shares at a specific price and time.

Kroger in June announced first-quarter results that topped analyst estimates and the company is expected to deliver higher year-over-year profits for the second-quarter -- even as the grocery industry grapples with higher food costs and soft consumer spending.

"The only known catalyst is their earnings scheduled next week. Investors have aggressively bought the September $30 calls on the belief that Kroger's share price could approach its 52-week highs," said Pete Najarian, a founder of Web information site optionmonster.com. "It may be that their earnings could be better-than-expected."

Option players this morning focused on the $30 calls, allowing them to buy Kroger shares at $30 apiece between now and September expiration.

A total of 11,600 contracts traded in that series late in the day, more than four times the previous open interest, suggesting new positions were set, Reuters data show.

In all, roughly 17,000 calls and 4,477 puts changed hands in Kroger, seven times the normal volume, data from option analytics firm Trade Alert show.

According to optionmonster's computer model, Wednesday's option volume for Kroger is the highest for the year, far above August's daily volume of about 2,000 contracts.

"This is unusual," Najarian said.

Kroger's option implied volatility -- the expected magnitude of share price movement conveyed by option prices -- set a fresh 52-week high at 44.6 percent with the glut of call buying ahead of the earnings report, said Interactive Brokers Group equity options analyst Rebecca Engmann Darst.

The fresh buying interest also extended to strikes $30 and $32.50 in the October contract, she said.

Overall open interest in Kroger options shows that puts and calls are virtually evenly split and on a day with very significant call buying, this indicates a sway in sentiment, Darst said.

On the New York Exchange, Kroger shares rose 13 cents to $28.08 in afternoon trade.

(Additional reporting by Lisa Baertlein in Los Angeles; Editing by Tom Hals)