You need to craft the kayran trap before you encounter the Kayran Boss fight.
For this baby there are a few little things to keep in mind.
At first when you meet one tentacle of this monster attacking the pier as introduction - your questlog suddenly tells you to talk to a guy named Cedric for some informations about fighting this beast. This guy is also a merchant, so enter his shop and buy the
Diagram: Kayran Trap - 1 Iron Frame, 1 Iron ore, 1 Silver ore and 2 oil
All these items are pretty basic, except the Iron Frame. This item is found in the backyard of Loredos Residence during the "Indecent Proposal" quest. And only during this quest, later visits result in finding nothing. You need to enter the backyard unspotted. Suddenly you will find a kind of surrounded place in the back area with many boxes and a chest. Inside you will find the Frame and a armor. Went to your friends the dwarfes, let them build this trap and face the Kayran. Infight you see some silhouettes that glow yellow, place your trap there and - instant cut of one tentacle and achievement ;).