Kroger (KR) announces strong earnings but weak forecast

{ Posted on Dec 09 2008 by Brent Archer }
Categories : BloggingStocks

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KR logoKroger (NYSE:KR - option chain) shares are falling today after the company reported adjusted Q3 earnings of 0.39 that beat estimates of 0.38, but also forecast fourth-quarter earnings of 49 to 52 cents per share, below analysts' estimates of 53 cents per share. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on KR.

This morning, KR opened at $25.78. So far today the stock has hit a low of $24.38 and a high of $26.02. As of 12:05, KR is trading at $25.44, down $1.87 (6.9%). The chart for KR looks bullish and S&P gives KR a positive 4 STARS (out of 5) buy ranking.

For a bearish hedged play on this stock, I would consider an April bear-call credit spread above the $32.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think, but still leverage nice returns. For this particular trade, we will make an 8.7% return in four and a half months as long as KR is below $32.50 at April expiration. Kroger would have to rise by more than 28% before we would start to lose money. Learn more about this type of trade here.

KR hasn't been above $32.50 at all in the past year and shown resistance around $28 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent controls bullish hedged positions in KR. Both those positions and the trade above can expire profitably at the same time.

Kroger (KR) announces strong earnings but weak forecast originally appeared on BloggingStocks on Tue, 09 Dec 2008 15:30:00 EST. Please see our terms for use of feeds.

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