Kratos Defense Stock Pullback Presents Buying Opportunity

Digging deeper, implied volatilities on the equity are at historically low levels following a post-earnings  volatility crush . The equity's Schaeffer's Volatility Index (SVI) of 43% registers in the 24th percentile of its annual range. If the SVI holds steady around its two-year average over the next couple of weeks, White's modeling shows that an at-the-money KTOS call option could potentially return 187% on another expected bounce from support at the 180-day trendline. In other words, prospective call buyers could almost triple their money on a 16% gain in the shares.

Despite the abysmal August, Kratos stock is still up 27.5% in 2019. And prior to that Aug. 1 bear gap, KTOS nabbed a 11-year high of $25.08 on July 31. Also supporting the bullish case is the equity's 14-day Relative Strength Index (RSI) of 24 as of yesterday's close, firmly in oversold territory, indicating a short-term bounce may be in the cards. 

Should a rally occur, it could be fueled by an unwinding of short sellers. Short interest fell off by 8.4% in the two most recent reporting periods to 7.93 million shares. However, this still accounts for a healthy 9.1% of KTOS' total available float, and more than a week's worth of pent-up buying power, at the stock's average pace of trading.

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Defense stock Kratos Defense & Security Solutions (KTOS) has been absolutely rocked in August, down 26% so far. The sell-off started on Aug. 1, when Kratos gapped lower in the wake of the company's downwardly revised full-year revenue forecast. This sharp pullback has brought KTOS to a key trendline that, if history is any guide, could be an intriguing entry point for options bulls.

More specifically, the security just pulled back its 180-day moving average. There have been six other the equity has tested support here over the past three years, per Schaeffer’s Senior Quantitative Analyst Rocky White, resulting in an average 21-day gain of 16.1%, with five of the six of the returns positive one month out. From its current perch at $17.85, a rally of similar magnitude would put KTOS near $21 for the first time since its Aug. 1 bear gap.

Digging deeper, implied volatilities on the equity are at historically low levels following a post-earnings  volatility crush . The equity's Schaeffer's Volatility Index (SVI) of 43% registers in the 24th percentile of its annual range. If the SVI holds steady around its two-year average over the next couple of weeks, White's modeling shows that an at-the-money KTOS call option could potentially return 187% on another expected bounce from support at the 180-day trendline. In other words, prospective call buyers could almost triple their money on a 16% gain in the shares.

Despite the abysmal August, Kratos stock is still up 27.5% in 2019. And prior to that Aug. 1 bear gap, KTOS nabbed a 11-year high of $25.08 on July 31. Also supporting the bullish case is the equity's 14-day Relative Strength Index (RSI) of 24 as of yesterday's close, firmly in oversold territory, indicating a short-term bounce may be in the cards. 

Should a rally occur, it could be fueled by an unwinding of short sellers. Short interest fell off by 8.4% in the two most recent reporting periods to 7.93 million shares. However, this still accounts for a healthy 9.1% of KTOS' total available float, and more than a week's worth of pent-up buying power, at the stock's average pace of trading.

Visit SchaeffersResearch.com to discover how you can use stock options to complement your investing portfolio.

We're an investment research company specializing in options trading, strategies, and education. We're also big fans of sentiment analysis, with a contrarian edge.

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