Kroger Option Shopping Ahead of Earnings

by Joseph Hargett | September 6, 2012 9:19 am

Cincinnati-based grocer Kroger (NYSE:KR[1]) has struggled in 2012, with the company attempting to attract customers despite a weak U.S. economy and rising food prices. However, prospects appear to be looking up for the country’s largest grocery chain, as the company raised its fiscal 2012 earnings outlook during its last quarterly report.

Investors will see if that forecast still holds come Friday morning when the company releases its second-quarter earnings report before the bell.

On average, analysts are expecting Kroger to post a profit of 49 cents per share on revenue of $21.57 billion, up from earnings of 46 cents per share on revenue of $20.9 billion in the year-ago period. Historically, the company has proven to be a steady performer in the earnings confessional, topping Wall Street’s expectations in three of the past four quarters by an average of about 3%.

That said, it would appear that many on the Street have set their sights considerably higher than the consensus estimate. In fact, Kroger’s whisper number arrives 4 cents higher, at 53 cents per share, according to

What’s more, analyst ratings also point toward a bullish bias, with 13 of the 23 brokerage firms following the stock rating KR a buy or better.

Speaking of price action, KR shares are currently sitting at $22.56 for a year-to-date loss of nearly 7%. Furthermore, while the stock has recently reclaimed its 50-day moving average, the shares are still staring up at stiff overhead resistance from their 200-day trendline. KR is also facing potential resistance near $23, an area that proved quite turbulent for the shares in April and May.

Not surprisingly, KR options traders have set their sights on the $22-$23 area ahead of the company’s quarterly report. Peak front-month call open interest totals roughly 3,048 contracts at the September 23 strike, while another 1,480 and 1,182 calls lie at the September 22 and 21 strikes, respectively.

On the put side, peak open interest totals 2,778 contacts at the September 22 strike, with 1,660 puts open at the September 21 strike.

The stock’s September open interest configuration hints at an optimistic lean from the speculative trading crowd. Additionally, looking at September implieds, it appears that traders are pricing in a post-earnings move of nearly 6%.

Optimism toward a struggling stock, such as a wealth of analyst buy ratings or an elevated whisper number, is typically seen as a warning flag for contrarian traders. Therefore, buying an in-the-money September 23 put ahead of the event could prove quite profitable. This option was offered at 70 cents, or $70 per contract, at the close of trading on Wednesday, placing breakeven at $22.30.

However, if you want to side with the bulls on KR ahead of earnings, you might want to consider a September 22/23 bull call spread. This spread will allow you to take advantage of a post-earnings rally, while limiting your losses should the trade go wrong.

The KR September 22/23 bull call spread was asked at 70 cents, or $70 per pair of contracts, at the close of trading on Wednesday. Breakeven rests at $22.70, while a maximum profit of 30 cents, or $30 per pair of contracts, is achievable if KR closes at or above $23 when September options expire.

As of this writing, Joseph Hargett had no position in any securities mentioned here.

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