[KR in Wikipedia]
KRI shall use the JUL series of options, which trades for the last time 30 days hence, on July 15.
Ranges
Implied volatility stands at 34%, which is 1.6 times the VIX, a measure of volatility of the S&P 500 index. KR’s volatility stands in the 77th percentile of its most recent range. The price used for analysis was $35.89.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 39.36 | 42.83 | 37.96 |
| Lower | 32.42 | 28.95 | 33.83 |
| Gain/loss | ±$3.47 | ±$6.94 | ±$2.07 |
by Angela Duckworth |
The Trade
KR peaked on Dec. 30, 2015, ending a rise that began in July 2012. It has sense gradually come down and is now trading about $7 off the peak.
Earnings announces have resulted in price rises in the next trading session three out of four times during the past year.
Brokerages come down collectively with a 38% enthusiasm index for KR, with 63% of 16 analysts issuing strong buy recommendations.
There's lots of optimism among brokers and earnings announcements have also tended to produce higher stock prices. However, the trend is down, and given the contradiction, I'll go with a direction neutral position.
First possible trade:
short the $32.50 puts and long the $30 puts,
sold for a credit and expiring July 16.
Probability of expiring out-of-the-money
| JUL | Strike | OTM |
|---|---|---|
| Upper | 37.50 | 72.0% |
| Lower | 32.5 | 81.4% |
The premium is $0.65, which is 26% of the width of the position’s wings. The stock at the time of entry was priced at $35.86, only $1.65below the upper boundary of the profit zone.
The risk/reward ratio is 2.8:1.
The zone of profit of the proposed trade covers a $2.50 move either way.
Second possible trade:
short the $32.50 puts and long the $30 puts,
sold for a credit and expiring July 16.
Probability of expiring out-of-the-money
| JUL | Strike | OTM |
|---|---|---|
| Upper | 40 | 91.8% |
| Lower | 32.5 | 81.4% |
The premium is $0.30, which is 12% of the width of the position’s wings. The stock at the time of 35.86 was priced at $35.86, which is $4.14 below the upper boundary of the profit zone.
The risk/reward ratio is 7.3:1.
The zone of profit in the proposed trade covers a $3.75 move either way.
Both possible trades:
The biggest immediate move after each of the past four earnings announcements was $2.85, and the average was $1.82. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.07.
Decision for My Account
There are no call option strike prices with odds of expiring out of the money for maximum profit in the 80s. There's a leap from 72% to 92%.
The first possible trade uses the lower call strike, which provides sufficient profit for a reasonable risk/reward ratio but very little protection against an upside earnings move.
The second possible trade provides plenty of protection against a post-announcement price move but insufficient profit, producing an unacceptably high risk/ratio ratio.
Given the lack of strong directional bias, I find both options to be unacceptable. I shall pass on trading KR. No trade.
-- Tim Bovee, Portland, Oregon, June 15, 2016
References
Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
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Disclaimer
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
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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