Kellogg Co (K) Calls....They're Gr-r-r-eat!!

Although the Dow Jones actually finished up a point today the market sure felt much weaker. I did, however, notice strength in the consumer staples, a name that has held up fairly well considering the rising commodity prices weighing on margins. As we enter earnings season I feel that the sentiment is so bearish in these names, that we could see some surprise reactions, as the names trade at fair valuations with high dividend yields, and can pass many of the costs on to the consumer, so the fears may be overblown.



One such name is Kellogg (K), a $20B maker of cereal and convenience foods, with shares trading 14.5X earnings and 1.6X sales with a 2.96% dividend yield. Shares were reiterated a Buy with a $60 target at Deutsche Bank in February and UBS recently reiterated it as a top pick in consumer goods, seeing Q3 as a turnaround inflection point for the group.

The chart is looking very bullish. As you can see on the weekly chart below shares carved out a rounded bottom around the $48 level and broke past a triple top around $53, now consolidating above that breakout level. The measured move of the breakout targets a move to $58.



Furthermore, Kellogg (K) has seen quite a bit of bullish options activity in recent months. Today the call volume traded 3X daily average, including a buyer of 1,000 May $55 calls at $0.95 on the PHLX (although tied to 48,000 shares short as a Delta Neutral strategy). The June $55 calls also saw more than 1,080 bought on the day. With IV30 at 17%, options are very cheap in the name, near 1 year lows. On February 7th, 2,500 of the June $55/$50 bull risk reversals were opened, and the January 2013 $60 calls are holding 6,915 in open interest from some large buyers a few months ago, so the sentiment is very bullish, and some even thinking an eventual buyout target, although it would take a sizable deal.

The simplest way to play a move higher here is with the May $55 calls at $1 or better, and look for an exit price of about $2.50.

(No Position: This is Not a Trade Recommendation)