Options Traders Banked a Quick Profit With Progressive Stock

Short covering may have aided PGR's recent rally

by Lillian Currens

Published on Feb 14, 2019 at 3:05 PM

Subscribers to Schaeffer's Option Advisor newsletter doubled their money with the Progressive Corp (NYSE:PGR) May 62.50 call. Here's a quick look at why we expected an outsized move from the insurance stock, and how the profitable options trade unfolded.

At the time of our recommendation on Friday, Jan. 25, insurance concern PGR had just bounced off support near the round $60 level -- double its 2005 peak. Further, PGR had a strong history of rallying from its 20-month moving average. During the fourth-quarter stock market swoon, PGR bottomed at this long-term trendline, and in late January was in the process of repeating history of the past five years. Plus, on Jan. 23, the stock had initially opened lower in the wake of the company's quarterly earnings report, only to erase those losses and ultimately finish modestly higher, pointing to its underlying strength. 

Short sellers had been ramping up their exposure, as well. Short interest had increased by 19% in the two most recent reporting periods to 11.23 million shares, a three-year high. This represented 3.1 times the equity's average daily trading volume -- a source of buying power that could help boost the stock.

Upgrades were a possibility, too. Three months prior to our recommendation, 11 out of 20 analysts had said to "buy" the shares. On Jan. 25, 14 out of 20 rated it a "buy," indicating that an upgrade cycle was in full swing, though there was still room for more bull notes to come down the pike.

In the wake of our recommendation, PGR stock extended its run higher -- likely boosted by a round of short covering, with short interest down 8.4% in the most recent reporting period. In fact, the security has only finished two down days since Jan. 25, and this rally allowed us to close our position on Tuesday, Feb. 12, and lock in a 100% profit in just three weeks.

PGR Chart Feb 14

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