Thursday, September 10, 2015

KR Analysis

Update 10/14/2015: KR moved above half of its potential profit and I exited, avoiding further time risk. Shares rose by 6.0% over 34 days, or a +64% annual rate. The options position produced a 104.6% yield on debit, for a +1,122.33% annual rate.

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
Implied volatility stands at 36.3%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. KR’s volatility stands in the 63rd percentile of its annual range.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

KR has one those odd options grids, where strike prices come at intervals other than the normal $5, $2.50 or $1.

Iron condor, short the $37.50 calls and long the $40 calls,
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.

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