KR Analysis

The Kroger Co. (KR)

Update 9/8/2017: KR came in 1 cent higher that the Street’s consensus earnings estimate, consistent with the small earnings surprise predictor score of 0.96 from Zacks Investment Research.

Shares fell $1.42 at the open, remaining within the profit zone and consistent with the low beta. In my preliminary analysis I noted that KR tended to see large moves on the second trading day after earnings were published. Rather than risk a loss, I exited at 14.7% of maximum potential profit, below my target of 25%.

The price move was within the bounds observed after the last four earnings announcements, including the $1.23 central tendency move, the narrowest of the metrics.

The price fall, despite the positive earnings surprise, coincided with Zacks’ negative view; the Zacks score is a bearish 4.

For the one-day holding period of my position, shares fell by 4.9%, or a -1,801% annual rate. Tye options position produced a 17.2% return for a +6,293% annual rate.


KR publishes earnings on Friday before the opening bell.

I shall use options that trade for the last time eight days hence, on Sept. 15.

Implied volatility stands at 45%, which is 3.8 times the VIX, a measure of the volatility of the S&P 500 index.

KR’s IV stands at the peak percentile of both its annual range and its most recent broad movement.

The price used for analysis was $22.47.

Premium: $1.70 Expire OTM  
KR-iron fly Strike Odds Delta
Long 26.00 90.1% 12
Break-even 24.20 ~74.0% ~53
Short 22.50 52.2% 52
Puts
Short 22.50 47.9% 48
Break-even 20.70 ~91.0% ~8
Long 19.00 90.5% 8

The premium is 49% of the width of the position’s wings.

The risk/reward ratio is 1.1:1.

The zone of profit in the proposed trade covers a $1.75 move either way. The biggest immediate move after each of the past four earnings announcements was $5.72, and the average was $2.09. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.23.

The expected move covering 85% of occurrences is $1.67, within the $1.75 break-even width.

The trade, then, provides coverage for all anticipated moves except for the biggest of the last year.

The bid/ask spread is 8.6%.

Decision for My Account

I have entered an order on KR as described above. The stock at the time of entry was priced at $22.50.

By Tim Bovee, Portland, Oregon, Sept. 7, 2017

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
Creative Commons 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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