Kellogg's (K): A Prime Example of How Following Options Action Pays

Kellogg (K) shares fell 6.87% today to $47.98, as low as $47.28 intraday, after posting a very weak earnings report and guidance. Without getting into the detail it was a major money maker.

As you can see, 9,314 August 50 puts traded today against open interest of 9,781, some closing positions, while someone was quick enough to buy 5,190 at 9:34am this morning on the ISE at $1.10. The contracts closed today around $2.30, more than 100% gain for that early put buyer this morning, and traded up above $2.50 at a point today.

However, the action this morning was not what gave this one away as put action jumped the last 2 days into earnings, with more than 6,400 trading yesterday, buyers at $0.55, including a block of 3,000 which now has gained $540,000 on the trade.

Even on Tuesday there was a buyer of 3,500 September $50 puts at $0.75 on the PHLX, those calls now trading at $2.90, a healthy $750,000 gain in 2 days.

However, traders were looking for a weak quarter way in advance. More than 2 weeks ago I put out the following note to clients, and much of my thesis for the bearish action came to fruition today. I recommended the August $50 puts at $0.70 that day, a solid 235% gain for two weeks in the puts:

"7/15 (Shares at $51.70)


Analysis:

Kellogg (K) is trading 3,900 puts, 6X average daily volume as IV jumps 10% with shares failing to climb back above its 200 day EMA for the past 6 trading sessions. A block of 1,500 August $50 puts were bought, and then some additional buying, also in September $50 puts, mainly offer side buying. Shares look to have topped out at 2008 highs making a double top, and could now retrace back below $50. The cereal maker trades 13.3X earnings, 1.56X sales, and 27.3X cash flow and could be hurt by the rising prices in oats and wheat, which are surging the past week. Kellogg will report earnings July 29th and CSFB says the Company is likely to lower guidance. Cantor started shares a Buy with a #$63 target on June 10th. The Company recently had a cereal recall that could impact upcoming earnings.

Trading Strategy: This is an ugly chart and the rationale makes sense, so the Aug. 50 Puts at $0.70 are worth bidding for."

As with any trading strategy it is not fool proof but when the stars align (the stars being technicals, options action, and fundamentals) you have a major edge in trading that brings big time profits.