Thursday Options Brief: SWY, GM & PGR

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Includes: GM, PGR, SWY
by: Interactive Brokers

SWY – Safeway Inc. – The North American retailer of groceries and consumer products reports fourth-quarter earnings five weeks from today, and it appears one options player may be locking in gains in Safeway’s shares should investors lose their appetite for the stock following the report. Shares today rose 1.25% to a six-month high of $21.82, on the heels of a more than 35.0% rally since the end of September. The largest transaction in Safeway options today was the one-by-two ratio put spread initiated in the March expiry in the first half of the trading session. It looks like the investor responsible for the spread purchased 4,100 in-the-money puts at the Mar. $22 strike for a premium of $1.09 each and sold 8,200 puts at the lower Mar. $20 strike at a premium of $0.37 apiece. Net premium required to establish the trade amounts to $0.35 per contract. The sale of twice as many lower-strike put options greatly reduces the cost of the directional play and suggests the investor expects limited bearish movement in the price of the underlying rather than a nosedive in the next couple of months. Profits – or downside protection – kick in if shares in Safeway decline 0.80% to breach the effective breakeven price of $21.65, while maximum possible gains of $1.65 per contract result in the event that shares drop 8.3% to settle at $20.00 at expiration in March.

GM – General Motors Co. – Shares in General Motors are up 0.80% at $24.70 after the Company revealed it sold 9.03 million vehicles globally in 2011, which could earn the Detroit, Michigan-based Company the title of world’s largest automaker by unit sales. One sizable options strategy on GM this morning looks for shares to remain range bound through April expiration. The 10,000-lot April $24 strike straddle, the largest options trade initiated on the automaker so far today, was sold at a net credit of $3.50 per contract. The investor selling the straddle may keep the full amount of premium received on the transaction if shares in GM settle at $24.00 at expiration. Some portion of the $3.50 premium is available to the trader as long as the price of the underlying trades above the lower breakeven price of $20.50 and below the upper breakeven point at $27.50 at April expiration. Shares in General Motors have not exceeded $27.50 since early August, but did close below $20.50 on a number of occasions during the same period, including eleven out of the thirteen final trading sessions of 2011. The stock has posted strong gains in the first three weeks of 2012, rising nearly 20.0% over the opening price of $20.83 on January 3. Fourth-quarter earnings from the Company are expected to be released five weeks from now.

PGR – Progressive Corp. – Better-than-expected fourth-quarter earnings announced by the insurer ahead of the opening bell lifted shares in Progressive 4.1% to a six-month high of $20.67 in the first half of the session and it looks like some options player expect the stock to extend gains in the near term. Call option volume on Progressive Corp. is heaviest at the February $21 strike where more than 1,500 contracts changed hands against open interest of 249 positions. The majority of these calls appear to have been purchased by one trader for a premium of $0.10 apiece. Profits may be available to the investor at expiration next month if Progressive’s shares rally another 2.1% to surpass the effective breakeven price of $21.10. The stock last traded above $21.10 in July 2011.