Wednesday, September 7, 2016

KR Analysis

The Kroger Co. (KR), a grocery chain headquartered in Cincinnati, Ohio, publishes earnings on Sept. 9 before the opening bell. It would normally be  prospect on Thursday, but I overlooked the earnings schedule when KR's volatility came in high (big oops), so let's take a further look today.

See my earlier analysis of KR here.

[KR in Wikipedia]


I shall use the OCT series of options, which trades for the last time 44 days hence, on Oct. 21.


Implied volatility stands at 35%, which is 2.8 times the VIX, a measure of volatility of the S&P 500 index. KR’s volatility stands in the 69th percentile of its annual range. The price used for analysis was $31.29.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Trade

KR has been in a downtrend since Dec. 29, 2015 and after a month-long pause since early August today resumed its downward course with an opening gap after analysts said negative things about its prospects.

Warren Buffet’s Ground Rules
by Jeremy C. Miller

Zacks Investment Research is neutral in its outlook and sees no prospect of an earnings surprise.

Brokerages in aggregate give KR a positive 13% enthusiasm rating, 28y 53% of 15 analysts issuing strong-buy recommendations.

So I'm staring at three indicators, bearish, neutral and bullish, which pretty much covers the possibilities.

Two of KR's last four quarterly earnings announcements have been immediately followed by higher prices, but the other two resulted in lower prices, which is awash.

I give greatest weight to the chart. Zacks is derived from the estimates of the brokerage houses, and when they disagree, I consider them to cancel each other. I shall go with a bear sprad.
Bear call spread, short the $32.50 calls and long the $35 calls,
sold for a credit and expiring 
Oct. 22.
Probability of expiring out-of-the-money


The premium is $0.47, which is 19% of the width of the position’s wings.

The risk/reward ratio is 4.3:1.

The stock at the time of decision was priced at $31.19.

The zone of profit in the proposed trade provides a  $1.31 cushion to the upside. The biggest immediate move after each of the past four earnings announcements was $2.65, and the average was $1.25. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.06.

Decision for My Account

The risk reward ratio is too large to earn a sufficient profit in relation to the potential loss. I'll take a quick look tomorrow to see if it's worthwhile giving it second look, but for now, I'm passing on KR.

-- Tim Bovee, Portland, Oregon, Sept. 7, 2016


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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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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