SWY – Safeway, Inc. – The national grocery store operator popped up on our ‘hot by options volume’ market scanner today after one bearish player purchased a large chunk of put options in the September contract. Safeway’s shares are down more than 2.6% to $19.69 this afternoon after the firm cut its full year earnings forecast and posted a 40% decline in second-quarter net income. The company reported profits of $0.37 a share for the quarter, meeting average analyst expectations, but lowered earnings guidance for 2010 to range from $1.50 to $1.70 a share down from earlier predictions of $1.65 to $1.85 a share. One pessimistic individual prepared for continued erosion in the price of the underlying shares by picking up 20,000 puts at the September $19 strike for an average premium of $0.55 per contract. The trader may be buying the put options to protect the value of a large position in Safeway shares, or could be initiating an outright bearish bet on the likelihood of shares of the grocery operator falling further ahead of expiration. Downside protection, if the puts were purchased as insurance, or otherwise profits start to accumulate if Safeway’s shares decline 6.3% from the current price of $19.69 to breach the effective breakeven point to the downside at $18.45 by expiration day.
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Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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