Trump Train Targets Kellogg

| About: Kellogg Company (K)
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After GrubHub and PepsiCo, Kellogg became the latest company to face calls for a boycott after it stopped advertising on the pro-Trump news site Breitbart.

So far, shares of PepsiCo and GrubHub have held up since boycotts against them were announced, so we looked at dark pool data for guidance on Kellogg.

Kellogg's Dark Pool Indicator was bearish, but its Gamma Exposure was a potential positive. We elaborate and present two hedges for longs looking to limit their risk.

Screen capture via Twitter.

Kellogg Becomes The Latest Post-Election Boycott Target

First came calls for a GrubHub (NYSE:GRUB) boycott. Then, the Trump Train targeted PepsiCo (NYSE:PEP). In both of those cases, the boycott calls were prompted by comments made by the companies' respective CEOs about the election of Donald Trump. Now there's a call for a boycott against Kellogg (NYSE:K) after the company announced it would no longer advertise on Breitbart, the news site formerly run by President-Elect Trump's chief strategist Steve Bannon. On Wednesday evening, the hashtag #DumpKelloggs was trending on Twitter (NYSE:TWTR), and included tweets such as the one pictured above.

Screen capture via Twitter.

Might the boycott calls have the opposite effect and drive sales for Kellogg? That's the hope of journalism professor and blogger Jeff Jarvis, who tweeted this call for residents of Brooklyn, Manhattan's Upper West Side and California to buy Kellogg's products:

Screen capture via Twitter.

One challenge with Professor Jarvis' idea is that many Upper West Side residents might be turned off by Kellogg's GMO issues. But it does raise the question of how effective boycott calls might be. We don't have sales numbers yet on the previous two post-election boycotts, but so far they haven't had big impacts on the companies' respective share prices. Shares of PepsiCo are down a little more than 1% since:

Screen capture via YCharts.

And shares of GrubHub are essentially flat:

Screen capture via YCharts.

To get a sense of where Kellogg shares might head in the near term, we looked the stock up on Squeeze Metrics (we have an affiliate relationship with Squeeze Metrics and are compensated if a reader joins the site).

Screen capture via Squeeze Metrics.

The chart above presents a mixed picture for Kellogg. The DPI, or Dark Pool Indicator, of 36% is bearish. DPI measures the ratio of shares sold short or held long by institutions in dark pools (recall that dark pools are private exchanges where institutions trade shares without the transparency of public markets; dark pools were elaborated on in an article earlier this year, Seeking Alpha In The Dark).

The GEX, or Gamma Exposure of -37,401 shares is the potential silver lining around the cloud of the bearish DPI. That represents the number of K shares option market makers would have to buy back if Kellogg rises 1% (for a detailed explanation of Gamma Exposure, see this article).

If you want to stay long Kellogg, but limit your downside risk in light of the above, we'll look at a couple of ways of doing so below.

Downside Protection For Kellogg

If you'd like a refresher on hedging terms first, please see the section titled, "Refresher On Hedging Terms," in this previous article of ours, Locking In Gold Gains).

Hedging Applied K With Optimal Puts

We'll use Portfolio Armor's iOS app to find optimal puts and an optimal collar to hedge K, but you can find optimal puts and collars without the app by using the process we outlined in this article, if you're willing to do the work. Either way, you'll need to know your "threshold," which is the maximum decline you are willing to risk. This will vary depending on your risk tolerance. For the examples below, we've used thresholds of 13%. If you are more risk averse, you could use a smaller one. All else equal though, the smaller the threshold, the more expensive it will be to hedge.

As of Wednesday's close, these were the optimal puts to hedge 1,000 shares of K against a greater-than-13% decline by mid-June.

Screen capture via the Portfolio Armor iOS app.

As you can see above, the cost of this protection was $2,100, or 2.92% of position value. A few notes about this hedge:

  • To be conservative, the cost was calculated using the ask price of the puts. In practice, you can often buy puts for less (at some price between the bid and ask).
  • The threshold includes the cost; in the worst-case scenario, your position would be down 10.08%, not including the hedging cost.
  • The threshold is based on the intrinsic value of the puts, so they may provide more protection than promised if the underlying security declines in the near term, when the puts may still have significant time value.

If you want to reduce the cost of hedging without increasing your threshold, you can try hedging with a collar instead.

Hedging K With An Optimal Collar

When hedging with collars, you need another number in addition to your threshold, your "cap," which refers to the maximum upside you are willing to limit yourself to if the underlying security appreciates significantly. As of Wednesday, the Portfolio Armor website estimated a potential return of about 2% for K over the next several months. Wall Street was more bullish, expecting a return of about 6% over the same time frame, based on the Nasdaq data below.

Screen capture via Nasdaq.

We were able to raise the cap to 7% without raising the hedging cost, so we used that.

As of Wednesday's close, this was the optimal collar to hedge 1,000 shares of K against a greater-than-13% drop by mid-June, while not capping an investor's upside at less than 7% by then.

Screen capture via the Portfolio Armor iOS app.

As you can see above, the cost of the put leg was the same as in the optimal puts, $2,100, or 2.92% of position value. But, as you can see below, the income generated from selling the call leg was almost as much, $2,050, or 2.85% of position value.

Screen capture via the Portfolio Armor iOS app.

So the net cost of this hedge was $50, or 0.07% of position value. Similar to the case with the optimal puts, the cost here was calculated conservatively, using the ask price of the puts and the bid price of the calls, so an investor opening this hedge would likely have paid less than $50 when doing so.

One note on this optimal collar:

  • Similar to the case with the optimal put hedge, it may provide more protection than promised if the K declines in the near future (and the investor exits then) due to time value (for an example of this, see this article on Hedging Apple). However, if the underlying security spikes in the near future, time value can have the opposite effect, making it costly to exit the position early (for an extreme example of this, see this article on hedging the Direxion Daily Gold Miners Index Bull 3x Shares ETF (NYSEARCA:NUGT) (Gold Miners Head To The Moon)).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.