The diversified retail chain Kroger Co. (KR), headquartered in Cincinnati, Ohio, publishes earnings on Friday before the opening bell.
[KR in Wikipedia]
I shall use the OCT series of options, which trades for the last time 36 days hence, on Oct 16.
Click on chart to enlarge.
|KR at 9:50 a.m. New York time, 30 days hourly bars|
|Week||SD1 68.2%||SD2 95%||Chart||Earns|
KR has one those odd options grids, where strike prices come at intervals other than the normal $5, $2.50 or $1.
short the $31.25 puts and long the $30 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money
The premium is $0.45, which is 24% of the average width of the position’s wings. The stock at the time of purchase was priced at $34.79.
The risk/reward ratio is 4.3:1.
The zone of profit in the proposed trade covers a $6.25 move either way. The biggest immediate move after each of the past four earnings announcements was $2.33, and the average was $0.96.
Decision for My Account
The risk/reward ratio is a bit higher than I like, although I can live with it. In order to get a reasonable ratio, I had to narrow the profit zone. The post-earnings maximum movement range is covered entirely by the profit zone. The one standard deviation range and chart range have poor profit coverage to the upside.
In this case, the earnings range trumps everything else. I have opened a position in KR as described above.
-- Tim Bovee, Portland, Oregon, Sept. 10, 2015
My volatility trading rules can be read here.
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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.License
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