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One Options Player Expects Big Things for Supervalu

A long straddle is employed on SVU in the back-month series

by 4/10/2012 3:15:56 PM
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Supervalu Inc.'s (SVU - 6.03) options are flying off the shelves in today's session, following this morning's quarterly earnings release. Both calls and puts are trading at increased levels, or seven times and four times their respective average intraday volumes. By the numbers, approximately 21,000 call contracts have crossed the tape, compared to around 15,000 put contracts.

Not only has this morning's announcement fueled options activity, but a promising outlook has saved SVU from today's broad-market bloodshed. In fact, the stock is up more than 13% in afternoon trading. This post-earnings jump is not reflective of the security's overall technical trend, however, with SVU sitting on a 34.5% year-to-date deficit. What's more, over the course of the past 60 trading sessions, the equity has lagged the broader S&P 500 Index (SPX) by more than 31 percentage points, on a relative-strength basis.

Daily Chart of SVU since January 2012

One options player in today's session used SVU calls and puts to employ a long straddle in the back-month series. Specifically, a block of 1,000 May 9 calls crossed the tape at $0.10, while a symmetrical block of 1,000 May 9 puts traded at $3.30. With both legs changing hands at the ask price, and no contracts currently open at either strike, it's safe to assume that these positions were bought to open. A net debit of $3.40 was incurred for the play.

The spread strategist will profit should SVU muscle above $12.40 (strike + net credit), or cower below $5.60 (strike - net debit) through May expiration. While the profit potential is theoretically unlimited to the upside, the gain is limited to $5.60 (strike - net debit) to the downside. If the stock remains in between the two breakeven levels over the next six weeks, the maximum potential loss on the play is limited to $3.40.

With SVU not touching the $12 mark since mid-October 2010, and no scheduled events on the horizon to provide a catalyst for the equity, this trader may be hoping today's post-earnings glow begins to fade. At last check, the security was hovering in the $6 neighborhood.


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