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Bears Shopping at Kroger Ahead of Earnings

A three-legged trade looks for volatile activity in Kroger shares


The broader markets are higher today, but the sentiment is bearish in Kroger (NYSE:KR) ahead of earnings.

OptionMONSTER’s Depth Charge tracking system detected the purchase of roughly 21,000 April 23 puts for 50 cents per contract. A similar number of contracts was sold in both the March 25 calls (for 17 cents apiece) and the March 22 puts (12 cents apiece). Volume was more than seven times open interest in all three strikes. This suggests that the activity consisted of new positions.

The overall trade cost 21 cents and has an unusual risk/return profile. It will make the most money if KR stays above $22 for the next two-and-a-half weeks (through March options expiration) and then plunges below that level. In this scenario, the March 22 puts sold short will expire worthless and they’ll have have almost unlimited downside during the following month because of the remaining long April 23 put.

If the stock falls below $22 too quickly, however, their profit will be capped at 376%. The only way the trade can lose money beyond the initial premium outlay is if KR rallies above the short-call strike of $25. This is a level the stock has not seen since last summer. Fourth-quarter earnings are scheduled for Thursday before the bell. Analysts are expecting per-share results of 49 cents, a 3-cent improvement over year-ago figures. In the past eight quarters, KR has topped the consensus estimate on seven occasions.

The grocery stock declined 0.21% to $23.83 in midday trading and has been drifting lower during the past month. It attempted to rally along with the rest of the market in December but has struggled since then. Some investors might be worried that rising fuel prices will crimp demand and erode the industry’s already-narrow profit margins.

The trade might have been the work of an investor who wants to protect a long position in the shares or of a speculative bear. (See our Education section).

Overall option volume is 37 times greater than average in the stock so far today. Put volume is easily outpacing call volume, 48,000 contracts to 22,000 contracts around midday.

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Article printed from InvestorPlace Media,

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