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Option Players Think Safeway Inc.'s (SWY) Gains Will Fizzle

Traders are picking up in-the-money puts on the heels of SWY's bull gap

by 6/13/2013 2:24 PM
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Safeway Inc. (NYSE:SWY) bull gapped this morning on news that it had sold its Canadian operations. Since then, it has pared some of those gains to trade at $24.95. In SWY's options pits, however, speculators are banking on additional downside over the next week or so.

Of the 15,000 Safeway puts that have traded -- 17 times the typical intraday amount -- roughly 3,100 contracts came in at the June 26 strike. The majority occurred at the ask price, and open interest is comprised of fewer than 1,000 positions, which together suggest the creation of new long positions.

The put buyers scooped up their bets at a volume-weighted average price (VWAP) of $0.68, meaning they will profit if the shares are at or below $25.32 (strike less VWAP) by front-month expiration next Friday. By that count, this morning's speculators would stand to gain if they sold to close their deep in-the-money puts right now. But even if they hang onto them -- perhaps to capitalize on the grocer going ex-dividend next Tuesday -- and the strategy backfires, the most they can lose is the premium paid.

Heading into the session, Safeway was already swelling with bearish attention. Not counting today's downgrade from Citigroup, nine of 12 analysts following the stock rated it "hold" or worse. Moreover, 21% of its shares are sold short -- a quantity that would take over two weeks of typical trading volume to cover.

More specific to the equity's status in the eyes of option players, SWY's 10-day put/call volume ratio is 0.89, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). That ratio places in the 78th percentile of annual readings, confirming an unusually strong appetite for puts over calls throughout the past two weeks.

Technically, Safeway Inc. (NYSE:SWY) is an intermediate-term laggard. Over the past three months, the shares have been outperformed by the S&P 500 Index (SPX) by nearly 11 percentage points. Moreover, even after today's bull gap, the stock is still off more than 12% from its multi-year high of $28.42, which it tagged on April 24 before an earnings-related bear gap the next morning.


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