Author: Andrew Keene
The Kroger Co. (KR) is set to report earnings before the opening bell tomorrow morning. The stock is currently trading around $38.15 in a 52 week range of $27.32-$39.43. KR has been relatively strong this year with shares rallying nearly 19% year to date. Ahead of the catalyst event tomorrow the stock appears to be primed for a move higher.
KR has an extremely strong record on earnings day. The stock has rallied 10 of the past 12 quarters from earnings to expiry with an average move of 5.29%. The chart of KR is also setting up for a bullish move. The stock is trading well above the Ichimoku Cloud indicating a solid bull trend in KR. With a bullish historical record and solid chart setup it is difficult to justify anything but a long setup in KR.
The options market is currently implying a move of around $2.00 by December expiration which would indicate a move of around 5.2% being priced into KR. With that in mind I can calculate an upside target around $40.15. Using this target I can look for a possible trade in KR.
Trade: Buying the KR Dec 37.5-40 Call Spreads for $1.00
Risk: $100 per 1 lot
Reward: $150 per 1 lot
Bank of Montreal (BMO) is a bank headquartered in Toronto Canada with primary operations in Canada and the United States. The company’s stock is currently trading around $57.80 in a 52 week range of $48.17-$74.25. The stock has been weak this year with shares falling by nearly 18.25% year to date. With the company looking to report earnings tomorrow morning before the bell it appears that the stock is primed to continue its downtrend after the number.
BMO has a historically weak track record on earnings day with shares falling 6 of the past 8 quarters with an average move of 1.3%. The stock has been in a rather tight consolidation pattern with shares failing to break out of the recently established trading range. The stock is above the Ichimoku Cloud but the future cloud is now sideways and does not have a clear upward slope. With stock at current levels options markets are implying a move of around $2.85 by December expiration. Using this implied move a trader can calculate implied targets for BMO on expiration. Given the weak historical movement and the consolidating chart in BMO it is difficult to justify anything but a short in BMO.
Using the stock’s current price level and the implied move I can calculate a downside target of $54.95. Since there are only $5 wide strikes in BMO I will have to setup a spread with a risk to reward ratio that is different than I would normally look for.
Potential Trade: Buying the BMO Dec 60-55 Put Spreads for $2.25
Risk: $225 per 1 lot
Reward: $275 per 1 lot
This trade profits if we trade to the measured move target and gives me a better than 1:1 reward to risk ratio.