A Big Investor's Betting on Safeway

By Mike Yamamoto

Apparently thinking that Safeway has put in a bottom, a big investor is using options to leverage a long-term recovery in the beaten-down grocery stock.

Our tracking systems detected the purchase of 10,000 January 2011 22.50 calls for about $1.65. Seconds later, an equal number of January 2011 15 puts were sold for $1.10. Volume was more than 11 times open interest in both strikes.

SWY rose 1.61 percent to $19.51 on Friday. The stock has been fighting its way higher since lowering full-year guidance on July 23, but is still down 18 percent so far in 2009. The S&P 500 Index is up 18 percent during the same period.

The options trade is designed to maximize profits from a gradual appreciation in the supermarket stock. It cost a net $0.55 to implement and will earn a profits from SWY closing above $23.05 by expiration. Because of the short position in the puts, it will lose money beyond the debit on a close below $15.

The transaction pushed overall options volume in the name to 12 times average.

(Chart courtesy of tradeMONSTER)

Comments

[satyr:]

Thanks for the information. Most recently, Kroger missed earnings and all of the grocers took a hit. From that, some analysts downgraded the entire group (as usual, too late to be of any use to anyone).

I think the reaction was too strong, as the fundamentals for SWY are reasonably good. Much of their scheduled capital outlays are flexible, given that they have already made the lion's share of their Lifestyle store update push. Also, they have modified their mix to be more competitive with the top end players (e.g.: WFMI) and invested in pricing in order to give some grief to KR and at least some of the discounters. This last move is what is shaving both margin and putting a small crimp in the top line. Eventually, the price wars will reach a stalemate, but I don't see that happening for a while - certainly not by January.

What I do imagine is that the strike threats from Colorado will subside, which is something hanging over SWY at the moment. Not that the unions have always refrained from shooting themselves in the foot (look at the SoCal strike earlier in the decade that nearly bankrupt the UFCW), but I think they may take a queue from the CAW and others, and decide to be satified that they have jobs and benefits. There are already more people signed up to replace them than there are jobs to fill. 10% unemployment has a funny way of doing that.

Sep 21 12:48 PM