Some speculative traders are betting big ahead of Safeway Inc. (NYSE:SWY - 15.77) earnings, hoping the beaten-down grocery name has a little bit of upside in it, at least over the short term. The stock is currently hovering very near its annual lows, thanks in large part to negative news last week from sector peer SUPERVALU INC. (NYSE:SVU - 2.37). Still, some call buyers think the stock might pop higher sometime this week, potentially after earnings are released on Thursday morning.

While call volume is currently running about 11 times ahead of what's typically expected, the out-of-the-money July 17 call is responsible for about 80% of this activity. Nearly 11,400 contracts have traded versus open interest of just over 1,000. More than half of these calls have traded off the ask price, and implied volatility has risen by nearly 14 points to 64.4%. It's safe to assume, therefore, that these are new positions being initiated by buyers. The average purchase price was $0.18 per contract.

If SWY is trading below $17 when these options expire this Friday, the call buyers will be out 100% of this 18-cent premium. In order to make these calls profitable by Friday's close, SWY will need to be trading above $17.18 (strike price plus premium paid), or a move higher of nearly 9% from current levels.

This is a fairly aggressive play, albeit a cheap one. SWY is below support in the $16-$17 area, which contained previous pullbacks in the retailer in April 2003, October 2004, and November 2008. Now that this region has been breached, it could now act as resistance. What's more, the stock has been underperforming the broader S&P 500 Index (SPX) by more than 26 percentage points during the past three months.

Today's call volume notwithstanding, sentiment is relatively mixed as Safeway earnings approach. Short interest is robust, representing almost one-quarter of the stock's float. It would take more than 11 trading sessions, at the stock's average daily volume, to cover all existing shorted shares.

In the options pits, however, the bulls have been in control. The 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) weighs in at 2.44, which is higher than 80% of the past year's readings. In other words, speculators are buying to open nearly 2.5 calls for each put, which represents an accelerated pace of call buying.

Analysts are expecting per-share results of $0.49, an eight-cent improvement from year-ago figures. In the past four quarters, SWY has exceeded expectations three times and matched estimates once (last quarter, according to Zacks). Heading into the report, five of 17 analysts following SWY rate it a "strong buy," leaving a little room for downgrade activity, should earnings not please the Street.