Schaeffer's Trading Floor Blog

Option Idea of the Week: Safeway Inc. (SWY)

Is SWY poised for another run higher?

by 11/15/2013 10:53 AM
Stocks quoted in this article:

Safeway Inc. (NYSE:SWY) shares have been on a technical tear, considering they have more than doubled in value during the past 52 weeks, and outpaced the broader S&P 500 Index (SPX) by north of 19 percentage points over the last three months. In fact, the security touched a six-year high of $36.90 on Oct. 25, amid revived speculation of an impending leveraged buyout offer. (The chain has been the target of similar rumors for well over a year.) SWY's subsequent pullback was cushioned by support at its 40-day moving average, after which the stock bounced. In other words, now could be an opportune time to wager on additional gains for the food and drug retailer, particularly in light of some lingering skepticism from the Street.

Daily Chart of SWY since April 2013 With 40-Day Moving Average

Jumping right in, data from the International Securities Exchange (ISE), Chicago Board Chicago Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day put/call volume ratio of 1.96 for SWY, confirming puts bought to open have nearly doubled calls during the last two weeks. This ratio registers in the 89th annual percentile, signaling speculators have been picking up puts over their bullish counterparts at a quicker-than-usual step lately. From a contrarian perspective, an unwinding of these bearish bets could amplify the stock's momentum down the road.

Elsewhere, although short interest on the security declined during the most recent reporting period, these pessimistic positions still make up a healthy 9.6% of SWY's available float. It would take nearly a week to buy back these shorted shares, at the stock's average daily trading volume. Should the shares continue to trek higher, they could end up benefiting from a wave of future short-covering activity.

This skeptical attitude is also evident among the brokerage bunch. Only five of the analysts covering the stock have handed out "strong buy" endorsements, compared to five "holds," and two "strong sell" recommendations. What's more, Thomson Reuters shows a consensus 12-month price target of $34.69 for the security, which is just a stone's throw away from SWY's current perch at $34.54. This leaves the door wide open for a round of upgrades and/or price-target hikes, which could serve as tailwinds for the equity.

Traders hoping to bet on some extended upside for Safeway Inc. (NYSE:SWY) may wish to think about purchasing the stock's in-the-money January 2014 29-strike calls, which sport an ask price of $5.80 right now.

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