Bears Bid Up Kroger Put Options Ahead Of Earnings

Volatility expectations surge as Kroger prepares to report earnings tomorrow morning

Patrick Martin
Mar 7, 2018 at 11:51 AM
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Kroger Co (NYSE:KR) is expected to report fourth-quarter earnings before the market opens tomorrow, March 8. Overall, Kroger stock has had a relatively muted year on the charts, having pulled back to trade just below its 2017 year-end close at $27.45, despite touching an annual high of $31.45 on Jan. 30. If past is precedent, though, the grocery stock could be gearing up for a big move following the report tomorrow. 

In terms of earnings reactions, Kroger stock ended lower the day after reporting in three of the past four quarters, although it enjoyed a 6.1% daily post-earnings gain last November. In fact, looking back over the last eight quarters, the shares have averaged a move of 6.1% in the session after earnings. For this particular quarterly report, the options market is pricing in a much larger-than-usual 11.5% one-day move, per Trade-Alert's implied volatility (IV) data.

From its current perch at $26.83, an upside move of that magnitude would push KR stock up toward the round $30 level, and above emerging resistance at its 20-day and 50-day moving averages. Meanwhile a drop of that size would put the shares a notch below $24 -- back in territory the stock hasn't visited since that late-November post-earnings bull gap, and below both its 80-day and 200-day moving averages.

Key KR stock levels ahead of earnings

Looking at sentiment data, the equity's Schaeffer's put/call open interest ratio (SOIR) sits at 2.66, with puts nearly tripling calls among options set to expire within three months. This ratio ranks in the 96th percentile of its annual range, pointing to a much bigger-than-usual put bias among near-term traders.

Also nearing 52-week high territory is KR's 30-day at-the-money IV of 45.2%, which registers in the 99th annual percentile. What's more, short-term speculators seem to be favoring the odds of a downside move, as evidenced by the 30-day IV skew of 4.8%, in the 80th percentile of its annual range.

Shifting gears to today, puts continue to be popular. Nearly 14,000 puts have traded so far -- six times what's typically seen at this point in an average session, with intraday volume pacing in the 97th annual percentile. Leading the pack is the March 28 put, where upwards of 5,100 contracts have traded at a volume-weighted average price (VWAP) of $1.32. These front-month puts will be profitable at expiration if KR is trading south of breakeven at $26.68.


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