Strangely enough, one of the most boring enterprises in the market is also one of the hottest. According to data from Yahoo Finance, grocery giant Kroger (NYSE:KR) represented one of Tuesday’s most active securities. Recently, trading volume for KR stock hit 5.097 million, comparing favorably to the three-month average volume of 7.726 million.
Not only that, market sentiment has been robust. Over the past 52 weeks, KR stock has gained over 27% of equity value. In contrast, the benchmark S&P 500 index moved up only 12.34% during the same period. At the same time, recent weakness presents a potential opportunity for contrarian speculators, with KR losing more than 5% in the trailing month.
Much of the optimism is centered on behavioral dynamics. Borrowing from game theory, investors can discretize the vastness and randomness of price action into market breadth — binary sequences of accumulative and distributive sessions. In doing so, we can then apply Markovian principles to determine forward probabilities based on discrete event state transitions.
Specifically, in the past two months, KR stock printed a “4-6-D” sequence: four up weeks, six down weeks, with a net negative trajectory across the 10-week period. In 47.5% of cases, the following week’s price action (which aligns with this week) results in downside, with a median loss of 1.54%. In the trailing five sessions, KR is down 2.38%.
If this trend continues, the equity would be on track to print a 3-7-D sequence by Friday’s close. If so, the following week’s price action has a 65% chance of upside, with a median return of 2.68%. Assuming that KR stock closes at $65.30, it may have enough fuel to just cross the $67 level in short order, perhaps within a week or two.
To be sure, KR stock really is a boring asset. As such, you’re probably not going to gain much profit from buying the security in the open market. Therefore, investors may turn to options.
For the simplest approach in the derivatives market, you could buy a call option outright. The problem is that the premium is pricey. At time of writing, the ask on the $66 call expiring June 20 is $1.92. That means KR would need to hit nearly $68 just to break even. It’s possible that KR could reach that price within that time period but it’s unlikely.
An arguably better approach is to consider the bull call spread. This transaction involves buying a call but simultaneously selling a call at a higher strike price. Usually, selling calls is dangerous because of the risk of unlimited liability. However, because you own a call at a lower strike price, the sold call is covered; hence, bull spreads are capped-risk, capped-reward trades.
Adventurous market participants may consider the 66/67 bull call spread expiring June 27, which involves buying the $66 call and selling the $67 call. The transaction requires a net debit paid of $57. Should KR stock rise through the short strike price ($67) at expiration, the maximum reward is $43, a payout of over 75%.
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