Dear Momentum Options Subscriber,
Kroger (KR, $58.78, down $0.72) will announce their quarterly earnings numbers on Thursday morning, ahead of Wall Street’s open. With shares at 52-week highs, the company will likely need an outstanding quarter with raised guidance to keep fresh 52-week peaks in play.
As you can see from the chart below, shares have rebounded nearly 20% from a mid-October low just north of $50. Additionally, shares have been in a strong uptrend since making a February low of $35.
The suit-and-ties have Kroger earning $0.61 a share on revenue of $24.8 billion for their recently ended third quarter. The low estimate out of the 19 analysts that cover the stock has the company earning a profit of $0.59 a share, which would have headline risk of a $0.02 miss.
The high target has Kroger earning $0.66 a share along with a top estimate for revenue north of $25 billion. This would mean a $0.05 beat and a gangbuster headline.
The company has surpassed Wall Street’s forecasts in the past three quarters by $0.01, $0.04 and $0.06. In the year ago quarter, they matched expectations.
Shares tend to be volatile after earnings, and the near-term options are pricing in roughly a 4% move following the news.
The KR December 60 calls (KR141220C00060000, $0.70, down $0.30) and the KR December 60 puts (KR141220P00060000, $1.85, up $0.30) would create a straddle option play and would cost about $2.50 to enter a position in both.
The break-even points would be $62.50 or $57.50 and would cover the cost of the trade if both options were purchased. The December options expire two weeks from this Friday, so there is risk to the trade of shares don’t make a large move after earnings or if the stock stays in between these levels.
A 5% move in the stock from current levels on Thursday or within two weeks would have shares pushing $63 or testing $57. This would make the aforementioned straddle trade a profitable one.
If shares moved 10% over the same time period, a run past $66 or a drop below $54 would get the calls or puts pushing $6, which would equate to a monster triple-digit return.
Shares were flat for much of September following second-quarter earnings results and hovered around $52 during that time. The stock jumped 4% from $47.27 to $49.84 when June’s numbers were released, but it failed to clear $50 by the end of the month. In March, Kroger tested $45.25 on the open but closed at $43.37 (down $0.31) following its earnings release.
Given the past three quarters, a move of 5% seems less likely unless the company beats Wall Street’s guidance or misses by a mile. On that note, the aforementioned straddle trade seems risky to buy, and it might make better sense to sell both options. This would create a “naked” position, and these types of strategies carry a different set of risk characteristics.
Bullish traders trying to play a directional move on the earnings announcement could use the December calls but will also have to worry about a “sell-the-news” event. Bearish traders have to worry about a massive beat with raised guidance and analysts upgrades.
Earnings trades can be tricky, but, by doing the homework, it makes it easier to define risk and reward and determine if it’s safer to swing the bat or sit in the dugout. I will likely pass on trading Kroger this time around, but there’s no denying the stock’s bullish trend.
As far as the market, the action has been sluggish, but the bulls are in the lead. The Dow is up 15 points to 17,894, while the S&P 500 is higher by 5 points to 2,071. The Nasdaq is gaining 5 points to 4,666, and the Russell 2000 is advancing 8 points to 1,177.
I could have a New Trade ahead of the close, so stay locked and loaded, as I am still doing the homework and math to see if the risk/reward profile is a good fit.
Momentum Options Play List
Closed Momentum Options Trades for 2014: 95-56 (63%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 1:35 p.m. EST.
Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.
Diamond Foods (DMND, $29.83, up $0.12)
DMND December 32 calls (DMND141220C00032000, $0.60, flat)
Entry Price: $0.87 (11/18/2014)
Exit Target: $1.75
Stop Target: None
Action: Near-term resistance is at $30.50. Earnings are due out on Monday, Dec. 8, after the close.
You can read my detailed write-up on DMND in the Nov. 19 Mid-Market Update.
IMAX (IMAX, $30.90, down $0.05)
IMAX December 32 calls (IMAX1220C00032000, $0.40, down $0.10)
Entry Price: $0.35 (11/12/2014)
Exit Target: $0.70 (Limit Order on Half)
Stop Target: None
Action: Shares have traded to a high of $31.06 today. Resistance is at $31.50-$32. Support is at $30.
International Business Machines (IBM, $162.68, up $0.01)
IBM January 170 calls (IBM150117C00170000, $0.85, flat)
Entry Price: $1.75 (11/10/2014)
Exit Target: $3.50
Stop Target: $0.50
Action: Resistance is at $163.50. Support is at $160.
You can read more about why I like this trade and its risk/reward setup in the Nov. 11 Pre-Market Update.
Flextronics (FLEX, $11.20, up $0.10)
FLEX January 11 calls (FLEX150117C00011000, $0.50, up $0.05)
Entry Price: $0.68 (9/5/2014)
Exit Target: $1.25
Stop Target: None
Action: Resistance is at $11.25-$11.50, and a close above the latter should get the 52-week high of $11.83 in play. Support is at $10.75, with backup at $10.50 and the 100-day moving average.
Trades on Hold — other 2014 Portfolio Open positions (2): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.
Rubicon December 8 calls (From August 2014) — Continue to hold.
Fortinet December 29 calls (from September 2014) — Continue to hold.
Editor and Chief Options Strategist