SWY, DECK Options – Unusual Trading Activity – January 11, 2013
This week we’re taking a look at unusual options trading activity in Safeway (SWY) and Deckers Outdoor (DECK).
As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.
This is something professional options traders pay a lot of attention to, and for good reason…
Unusual options activity can “tip off” big moves in a stock, either up or down.
So let’s take a look at some ‘interesting’ activity that caught our eye this week:
Safeway Options (SWY)
Option activity on food and drug retailer Safeway picked up today. At least one trader thinks $15 is the floor for SWY.
SWY is currently trading for $17.25 per share. The stock is up 20% from the 52-week low of $14.73 it reached last July. But SWY is still down 22% from the 52-weel high of $22.31.
One trader sold a block of 6,170 of the June 2013 $15 puts for $0.71. As the seller, he immediately collects the premium. In this case, he pockets $438,070.
If SWY stays above $15 through options expiration in June, the options will expire worthless and the trader will get to keep the entire $438,070. But if SWY falls below $15, the trader is on the hook to buy 617,000 shares of SWY at $15 apiece.
Obviously, this trader believes SWY will either hold above $15 or they’re comfortable buying the stock at an average price of $14.29.
Let’s take a closer look at what’s been going on with SWY lately.
Last quarter Safeway came up short of Wall Street’s revenue estimates. Sales actually declined 0.2% to $10.04 billion in the third quarter. But SWY’s earnings per share came in better than expected.
You might be wondering how earnings per share improved when sales are slowing.
SWY accomplished the EPS increase by buying back a massive 31% of the outstanding shares between 3rd quarter 2011 and 3rd quarter 2012. But they didn’t have the cash to fund the share repurchase so they ended up taking on additional debt to fund them.
They also paid off some of their old debt with new loans. And because interest rates are so low, their interest payments actually declined last quarter. Clearly, management at SWY is taking every advantage the current low interest rate environment is giving them.
But here’s the thing…
The benefits of the massive buyback are only temporary. In 2013, SWY will have to compare EPS to other quarters after they had already completed their massive share buyback.
That means EPS growth will have to come from actually growing the business. And that could spell trouble for the retailer that’s seen revenues and margins shrink over the past year.
Is this a good trade?
I don’t like SWY’s fundamentals. Slowing sales and shrinking margins are going to catch up with company this year. But from a technical viewpoint, this looks like a good trade. Selling put options below the recent low gives the trader a good opportunity to pocket some quick cash or pick up shares at a deep discount.
Deckers Outdoor Options (DECK)
Call volume on Deckers Outdoor (DECK) has been on the upswing this week. Yesterday, call volume on DECK soared to 25,000 contracts. Traders are clearly looking for DECK to move higher in the weeks ahead.
DECK is currently trading for $36.66. The shares are up 28% since reaching a 52-week low in November. But the shares are still 60% off the 52-week high of $98.27 they reached last February.
One trader bought a block of 9,500 March 2013 $45 calls for 37.5 cents. They’re obviously looking for DECK to make a big move over the next few months. In fact, DECK needs to increase by more than 23% between now and options expiration in March just to break even.
Here’s the thing…
DECK had an awful 2012. Management consistently overestimated the company’s prospects. And when they didn’t live up to those lofty expectations, the stock was repeatedly taken out to the wood shed.
All in all, DECK dropped 68% from peak to trough in 2012.
After such a horrible year, why are option traders suddenly so bullish?
For one thing, the company has repurchased about $185 million worth of stock. And they were able to accomplish this with cash on hand.
What’s more, costs are expected to be down in 2013 relative to 2012. And they’re reporting sales of the top selling winter boots, UGG boots, are increasing after a warm winter last year derailed sales growth.
This trader is clearly expecting DECK’s share repurchase to fuel strong earnings per share growth in the 4th quarter. And if sales of UGG boots accelerate, the stock could easily push these speculative calls into the money. But this is obviously a speculative bet and could just as easily blow up in the trader’s face.
One thing’s for sure, it will be interesting to see how this one plays out.
More Options Ideas…
That wraps up this week’s unusual options trading and volume…
Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.
We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!
So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!
Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
